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Societe Generale rescues SIV fund to avoid fire sale

Section: Daily Dispatches

By Sebastian Boyd and Gregory Viscusi
Bloomberg News Service
Monday, December 10, 2007

Societe Generale SA, France's second-biggest bank by market value, will bail out a $4.3 billion fund after losses related to the collapse of the U.S. subprime-mortgage market to avoid a fire sale of assets.

Societe Generale is following London-based HSBC Holdings Plc and Rabobank Groep NV of Utrecht, Netherlands, in rescuing structured investment vehicles. Societe Generale was "very close" to having to cede control of its Premier Asset Collateralized Entity Ltd., or PACE, to an outside trustee, Standard & Poor's said Dec. 7.

"They jumped before they were pushed to avoid being forced to sell assets," said Nigel Myer, a credit analyst at Dresdner Kleinwort in London.

Societe Generale will take on assets including $387 million of bonds backed by subprime mortgages, the Paris-based bank said in an e-mailed statement today. Societe Generale rose 1.23 percent to 107.85 euros ($158.65) as of 4:20 p.m. in Paris.

The bailouts by Societe Generale, HSBC, and Rabobank further limit the role of the proposed $80 billion "SuperSIV" fund being set up by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. and sponsored by U.S. Treasury Secretary Henry Paulson.

The so-called master liquidity enhancement conduit, or M- LEC, is aimed at addressing the fallout from U.S. home loan defaults. Investors have shunned the short-term debt used by SIVs to finance purchases of higher-yielding securities because of concern about holdings related to mortgages.

Subprime loan delinquencies reached a 20-year high in the third quarter, according to data from the Mortgage Bankers Association.

The rescue will cause Societe Generale's ratio of Tier 1 assets, a measure of financial strength, to fall by 5 basis points, Societe Generale said in its statement, citing "market conditions" for the decision. The bank said last month that its Tier 1 ratio was 7.7 percent at the end of September.

"The modest impact on the capital ratio shows that this move makes good sense," said Salah Seddik, a fund manager at Paris-based Richelieu Finance, which oversees $7.3 billion. "The worst seems to be over and we are heading back to normalcy, but it's still a sector to be cautious about," said Seddik, who doesn't hold Societe Generale shares.

SIVs are designed to get cheaper financing by borrowing in the short-term commercial paper market. They invest the money in higher-yielding assets and pay the returns to holders of their longer-dated capital notes, which rank after commercial paper for repayment and are first in line for losses.

Societe Generale's PACE is among $105 billion of SIVs that Moody's Investors Service may downgrade in its biggest wave of rating cuts since subprime mortgages caused credit markets to slump.

The value of the French bank's own $103.5 million investment in capital notes sold by PACE fell 73 percent to $27.6 million at the end of November, the bank said.

Bonds backed by home loans, including subprime debt, comprise 12 percent of PACE's holdings, Societe Generale said. Collateralized debt obligations make up another 19 percent. Debt guaranteed by monoline bond insurers accounts for 18 percent and bonds backed by other debt such as student loans represent 26 percent.

"This is more than manageable in terms of size for Societe Generale, albeit it is not of the best quality," said Tom Jenkins, a credit analyst at Royal Bank of Scotland Group Plc. "The match-funding avoids fire sales."

Credit-default swaps, contracts used by investors to speculate on credit quality, were unchanged at 36.5 basis points, or 36,500 euros to cover 10 million euros of Societe Generale's debt, according to Deutsche Bank AG.

French banks so far have reported smaller losses from subprime holdings than U.S. and European competitors. Moody's said in a Nov. 23 report that no changes in ratings are warranted at this point.

UBS AG, Europe's largest bank by assets, said today it will write down U.S. subprime mortgage investments by $10 billion, the biggest loss by any European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East.

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