I'm sure most of you saw this (but in case you missed it!) there is a nice post on Alphaville today about the resurgent use of SIVs. Some banks are beginning to use them in an attempt to provide liquidity to money market funds. The post describes how banks will use Fed-funded SIVs to bail out these funds. The SIVs will raise money by issuing commercial paper. Of this issued paper, the sponsoring banks will be required to hold 10%, with the rest of the funding being provided by the Fed.
Although Alphaville hints at this, they don't quite outright ask it. What happens when the commercial paper turns bad? Well the CP that is of bank origin will presumably end up in some shape or form being rescued by the Fed. What about that of non-banking corporations? Or worse: bank-like corporations (read GMAC)? Essentially the Fed holds the right to stop purchasing activities of these SIVs and hold their assets to maturity if any default or credit downgrades occur.
Effectively, in a deleveraging environment, banks will hold commercial paper for their money market funds off their balance sheets using Fed-provided leverage. Lets hope the banks never have to pay back the loans when (if) corporate defaults rise.
Tuesday, October 21, 2008
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I cannot believe that something like this can happen in the united states of america. We who live in the united states where the type of type of financial shenanigans occuring on a daily basis would only be thought of as happening in third world countries maybe South America. But now their happening here. In some cases daily. I don"t believe that we are seeing so much of a big increase in the financial shenanigans today but less enforcment of violations of securities laws by the SEC. I can remember back in the nineteen eighities when almost two thirds of all the savings and loans were taken over by the FDIC the arm of the federal government that is suppose to regulate banks and other financial institutions. Their were thousands of persons charged with all sorts of crimes during and after the savings and loan debacle. I cannot believe that not anyone on wall street has been charged with any sort of crime whatsoever after the financial crisis of two thousand eight and two thousand nine that almost brought down the whole financial system.
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