Banks Drop Treasury-Backed Plan to Bail Out SIVs

Banks Drop Treasury-Backed Plan to Bail Out SIVs

Dec. 21 (Bloomberg) -- Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. abandoned a U.S. Treasury- sponsored plan to buy assets from cash-strapped structured investment vehicles.

The ``SuperSiv'' fund brokered by Treasury Secretary Henry Paulson, slated to be about $80 billion when it was announced in October, ``is not needed at this time,'' the banks said in a statement today.

The need for a bailout has diminished as HSBC Holdings Plc, bond insurer MBIA Inc. and other companies that manage SIVs arranged their own rescues. The steps lessened the threat that SIVs will dump their holdings and further roil credit markets contaminated by losses in securities tied to subprime mortgages. New York-based Citigroup said last week it would guarantee $58 billion in debt from SIVs it manages in order to avoid a forced sale of the assets.

``The market is in surgery and they can't even get the Band- Aids to work,'' said Thomas Flaherty, who manages $25 billion in corporate debt at Aberdeen Asset Management in Philadelphia.

More than 20 banks, SIVs and investment managers participated in the discussion with BlackRock Inc. serving as the adviser, the statement said. The banks could revive the plan if needed.

`A Better Position'

SIVs reduced their holdings to less than $265 billion from $340 billion during the summer, the banks said in the statement. The assets are expected to continue to decline.

``The private sector participants always indicated that this vehicle was designed to complement other market solutions,'' Jennifer Zuccarelli, spokeswoman for the Treasury Department, said today in a statement. ``The department appreciates the efforts of the financial professionals.''

Citigroup took $49 billion in SIV assets onto its balance sheet, following decisions by banks, including HSBC and WestLB AG, to take on the assets of SIVs or provide financing to ones they manage.

``It basically means the bank is going to stand behind those SIVs, which is probably a better position for any investor than having it come under an umbrella super fund which is then going to eat up some of the asset value on fees,'' said Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts, on Bloomberg TV.

Moody's earlier this month said it was considering whether to cut the ratings on $105 billion of debt sold by SIVs, which were set up to make money by borrowing in the commercial paper and medium-term note markets and buying longer-maturity, higher- yielding assets such as bank notes and mortgage bonds.

Shunning the Debt

Investors started shunning the debt or demanding yields that would have been prohibitive for the SIVs after learning that some of the companies bought securities tied to subprime home loans, or mortgages for people with poor credit.

SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record-high defaults on subprime mortgages. Citigroup invented SIVs in 1988 and was the biggest manager of the funds.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody's. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt.

BLOOMBERG