Citigroup (C), JP Morgan (JPM), and Bank of America (BAC) are closer to setting up their "super fund" to supply short-term loans to structured investment vehicles, pools of money which are made up primarily of debt that no longer trades. As The New York Times says "the proposed fund could help thaw the frozen market for asset-backed securities by establishing a ready buyer, even if no SIV uses it. SIVs are currently struggling to find buyers for their assets; no investor wants to be the first one into the market, only to watch prices drop even more a few hours or days later."
But, the rules of engagement for the fund have become odd. The paper writes that "the backup fund will not distinguish between the assets it buys from each SIV; instead, it will assign the same risk level to all their troubled securities."
The idea of the "super fund" had the appearance of the large banks helping out Citigroup, which has an unusually high number of affiliated SIVs. That appearance has not gone away. By failing to take into account the varying shades of value for the assets in the SIVs, the plan perverts the concept of market demand and dispatches one of the primary purposes for undertaking risk. If an asset can be assigned an artificial value when it trades, the value of that asset might be nil.
The new program may put off the day of recking for the SIVs, but with the market in severe turmoil, it is likely that the artifice will only work for so long.
Douglas A. McIntyre
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