Moody’s has begun to downgrade the debt in a number of the structured investment vehicles that own huge pools of mortgage-related securities.

According to The Wall Street Journal "in its report, Moody’s said it had cut, or might cut, ratings of the debt issued by the funds. Moody’s said certain SIVs owned assets with deteriorating values. Some SIVs now could hit financial triggers that would speed up asset sales."

The "super fund" that was to be set up by Citigroup (C), JP Morgan (JPM), and Bank of America (BAC) to give these SIVs short-term loans has not materialized. And, if the SIVs have to sell off a large portion of their assets, the fund may never be formed.

CIti sponsors SIVs with $83 billion in assets, held in seven funds.

If these SIVs are partially liquidated or face that prospect, Citi may have to step in with billions of dollars of loans in a attempt to save them

The "super fund" always looked like a way for big banks to get Citi out of a tight spot. It was the equivalent to making short-term loans to itself in the hope that the SIV assets would rebound in value. Alan Greenspan and other observers have pushed to let the SIVs sell-off their holdings, and, in essence, mark them to market. It is a noble statement and one that free market thinkers have embraced.

But, it could get Citi into much, much more trouble.

Let’s hope they have the emergency phone number at the Fed.

Douglas A. McIntyre

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