'Super SIV' fund seen as device for ingratiating banks with the government


Bank of America Takes Lead
in Backing 'Super SIV' Fund

By David Mildenberg and Christopher Condon
Bloomberg News Service
Monday, November 26, 2007


Bank of America Corp., the nation's second-largest bank, will lead efforts by Citigroup Inc. and JPMorgan Chase & Co. to convince smaller competitors to help finance an $80 billion bailout of short-term debt markets.

The campaign starts this week with New York-based Citigroup and JPMorgan in supporting roles to Charlotte, North Carolina-based Bank of America, said two people with knowledge of the matter, who didn't want to comment publicly before the plan is formally announced.

The "SuperSIV" fund, backed by U.S. Treasury Secretary Henry Paulson, would buy assets from so-called structured investment vehicles, whose $300 billion of holdings include corporate and mortgage debt in danger of default. Analysts including Richard Bove of Punk Ziegel & Co. have criticized the proposal because it may saddle new participants with losses created by their bigger rivals.

"Why should we put something on our balance sheet that is going to result in further writedowns?" is how most contributors will respond, Bove said in an interview. "The job of the Treasury isn't to go out and defraud investors."

Bank of America, Citigroup, and JPMorgan, the three largest U.S. banks, want the SuperSIV fund in place by year-end because some SIVs haven't been able to trade, people familiar with the fund said. BlackRock Inc., the biggest publicly traded U.S. money manager, probably will manage the fund, said a person with knowledge of the plan.

Officials at Bank of America, Citigroup, and New York-based BlackRock declined to comment. A call to JPMorgan spokesman Brian Marchiony wasn't returned. JPMorgan's involvement in the fund is meant to help SIVs "properly liquidate," Chief Executive Officer Jamie Dimon said on Nov. 13. "SIVs don't have a business purpose" and will "go the way of the dinosaur," he said.

Bank of America dropped 10 cents to $43.05 in 10:14 a.m. New York Stock Exchange composite trading. Citigroup lost 32 cents to $31.38. JPMorgan fell 39 cents to $41.56.

HSBC Holdings Plc, Europe's largest bank, will bail out two SIVs by taking on $45 billion of assets and said today in a statement that other banks will follow its lead. The London-based company said it doesn't expect the decision to have a "material impact" on earnings.

SIVs borrow in the $835.8 billion asset-backed commercial paper market and then buy longer-dated bank bonds, mortgage- backed securities and collateralized debt. Investors have become reluctant to deal with SIVs because holdings are difficult to value now that trading has collapsed in some mortgage debt markets. That's stoking concern SIVs will sell assets at distressed prices, adding to turmoil in credit markets.

SIV holdings have declined $75 billion since July, and net asset values have fallen to 70 percent from 100 percent in July, according to data compiled by Fitch Ratings. Net asset value is what's left after selling all assets and paying debts. The commercial paper market -- debt due in 270 days or less -- has shrunk 29 percent from its Aug. 8 peak of $1.18 trillion.

Bank of America "has far more to gain down the road" with regulators by backing SuperSIV, said Tony Plath, a financial professor at the University of North Carolina at Charlotte, who expects the plan to fail. "They are setting themselves up so they aren't criticized when this thing falls apart."

The need for a fund like SuperSIV to calm credit markets has grown more pressing, analysts Birgit Specht and Jonathan Neve of Citigroup Global Markets Ltd. wrote on Nov. 21.

"Net asset values keep falling, debt continues to mature, and sentiment has deteriorated further," the analysts said. The fund will provide "a liquidity backstop" for about a third of the SIV assets, limiting the benefit, Specht and Neve said.

Treasury spokeswoman Jennifer Zuccarelli said the department "is pleased with the work the private sector is doing on a structure that is meant to improve liquidity" for all participants.

Charlotte, North Carolina-based Wachovia Corp., the fourth- largest U.S. bank by assets, has pledged support, while Boston-based State Street Corp. CEO Ronald Logue said Oct. 16 "you won't see us participating in any way."

Deutsche Bank AG, Germany's biggest, was awaiting more details, Chief Executive Officer Josef Ackermann said last month. Terms for participants haven't been publicly released.

The fund's lack of disclosure makes it "a necessary failure," Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said in an Oct. 31 interview. "Transparency is what the Treasury and Fed are supposedly all about."

Former Federal Reserve Chairman Alan Greenspan is among critics who say SuperSIV may do more harm than good by delaying the need for investors and SIVs to absorb subprime losses.

Loomis Sayles & Co. declined to invest after receiving one of 16 invitations for a personal meeting last week with current Fed Chairman Ben Bernanke, said Daniel Fuss, who oversees $22 billion as chief investment officer at the Boston-based firm. The Securities Industries Financial Markets Association trade group extended the invitations, Fuss said.

"It's so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke," said Fuss, who decided participating wasn't worth the risk to his firm. "Oh, boy, did I feel important for about 27 seconds, and then you smell a rat."

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