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Straws in the Wind 11-1-07

Updated on November 1, 2007

Master Liquidity Enhancement

Market Crashes Following Fed Rate Cut

As of 2:10pm the Dow Jones Industrials Index is down 262 points following the move upward yesterday after the 1/4 point Fed rate cut. I guess this is consistent with the old saw "Sell on the good news. Buy on the bad news." Investors apparently were spooked today by the Fed's pointed warning not to assume that more cuts were on the horizon.

Liquidity Enhancement

$75 Billion "Master Liquidity Enhancement Conduit" Seen as a Hospice, Not a Cure

Eric Dash reports in today's NYT that the $75 billion fund created by CitiGroup, JP Morgan Chase and Bank of America upon the suggestion of Treasury Secretary Henry Paulson should be viewed as "hospice care" rather than a cure for the troubled SIV investment funds and their bank sponsors.

The proposed hank fune "is a more a towlin to get them (the SIVs) to the scrapyard," Lou Crandall, chief ecnomist at Wrightson ICAP, a financial research firm, said.

Citigroup's seven SIVs are under pressure to repay investors. Several less robust funds could face downgrading. Overall, the 30 or so SIVs have been forced to sell assets at an alarming pace--shedding roughly $75 billion since July and shrinking the industry by a fifth. Market participants expect SIVs to unload even more, as much as $15 billion a week.

Unlike sturdier investment funds, SIVs do not have enough reserve financing to cover assets if they run into trouble. While risky, such an operating strategy allowed SIV operators to shave costs and collect millions in fees when times were good.

The MLEC is intended to give the SIVs breathing room so they can avoid selling their assets all at once, and perhaps allow a few of them, largely those sponsored by the big banks, to work out a survival strategy. The goal is to provide an orderly unwind or promote a restructuring.

At best, this might allow time for depressed asset prices to recover, though most market analysts say this is unlikely. At worst it would give the weakest SIVs time to sell their holdings without disrupting the broader market.

Analysts say the fund will not benefit all SIVs equally, with those sponsored by big banks benefiting the most.

With a combined $80 billion of assets, Citigroup's seven SIVs account for nearly a third of the industry. Citigroup itself has no direct exposure. But its reputation is at stake if it does not absorb the losses of its investors. The fund could provide Citigroup with a few additional months to revamp. At least ten foreign banks manage SIVs.

[Citibank's stock tumbled today as the SIV fiasco unfolds. As Warren Buffet observed. "Kidding a toad won't turn it into a prince, and you can't turn a toad into a prince by re-packaging it."

They want to avoid a fire sale which would result in large write-downs that could accelerate the unraveling of these special investment vehicles.

But they also want to avoid bringing the loans onto their balance sheets which would hurt their returns.

Analysts say that most SIVs, especially those not sponsored by nan ks or without longstanding reputations, will find it hard to survive.

"We will find new creative ways of overleveraging," Mr. Crandall said, "but that particular one will be a hard sell for a forseeable future. It may look like a SIV. It may act like a SIV. But you can be sure it's not going to be called a SIV."

Prolonged Drought Threatens Australia's People, Wildlife and Economy

Science News reports that Austalia is facing the most sever drought in the country's modern history. Extreme water conservation measures which are being applied cannot solve the shortage of water. The Science News article about the Great Australian Drought is linked below.


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    • Ralph Deeds profile image

      Ralph Deeds 10 years ago from Birmingham, Michigan

      Amen. Effective regulation helps assure that the market system honestly delivers the benefits as advertised.

    • William F. Torpey profile image

      William F Torpey 10 years ago from South Valley Stream, N.Y.

      I'm glad to see someone call attention to this disaster. Some day, maybe, the powers that be may carry out their responsibilities and demand that big business behave responsibly -- before we're hit with chaos.