The beautifully named SIV Master Liquidity Enhancement Conduit (SMLEC), the fund the big investment banks are putting together to rescue each other, is a stitch-up. Roubini has a dense but compelling post about it that argues:
it is not about resolving a "coordination / liquidity" crisis because so many of the assets that are held by the "Special Investment Vehicles" (SIV) are in fact dud, rather than illiquid. So the SMLEC super-fund, if it attracts new lenders, will have to cherry pick the good assets out of the SIVs. But if it cherrypicks, then the SIV problem, and facing up to the losses, only gets worse - they are left with all the bad assets. (Remember, and this is important for later, the SIVs are the not-quite-arm's-length companies set up by the banks to hold these risky, mis-priced assets. Some of them are fully fledged hedge-funds, some of them are pure legal fictions ... there is a continuum of specialness in the SIV world).
Liquidity is only an excuse - if that were the rationale, it would clearly fail to do anything other than shuffle around the furniture.
Why is Wall Street dressing up a problem of dud investments as a problem of liquidity? Roubini has a striking answer: because they are getting others to pay for the downside, again. Here is how it works. SIVs were used to keep lending - often for bad projects - off banks' balance sheets. This essentially meant that the lending was un-regulated, and that it did not fall under the rules for basic banking prudence of the Bank for International Settlements. Relieved of the usual constraints of prudent banking, the SIVs could operationalise the "infinite demand for cash flow" that Wolgang Munchau's highlighted in his column yesterday. In the good times of negative real interest rates, off-balance sheet meant you could lend more, less prudently, with less oversight, and with fatter boni.
But, as winter comes, the chill of paying for money gets felt, and the prospect of some of those loan-related products going bad, wouldn't it be nice to onve again fit into the cosy social contract of banking regulation: "we promise to be prudent, you, society, promise to be the lender of last resort if ill-luck turns to panic". SMLEC is exactly this: a way of repatriating as many loans as possible from the now chilly world of zero-regulation to the comfort of state guarantees.
Clever Wall Street.
<!--break-->
