Citigroup still failing to stop the SIV sceptics

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“You can’t bail out anything with a siv,” goes the gag at Citigroup, where executives are exasperated by suggestions that the plan for a $75bn mortgage securities “supersiv” represents some sort of bail-out for the bank.

Citi, together with JPMorgan Chase and Bank of America, is trying to set up a fund that would buy assets from cash-strapped structured investment vehicles (SIVs).

The banks, and the US Treasury, which has been actively encouraging the plan, believe it could help prevent the “disorderly” unwinding of SIVs and protect the important asset-backed commercial paper market. SIVs are mainly funded by the issue of short-term commercial paper.

Bob Steel, US Treasury under-secretary, insisted at the weekend that the plan was designed to benefit the entire market, not a particular segment of it. But some sceptics, including some banks that the backers are trying to persuade to provide financing for the fund, see it as very much directed at Citi.

Citi is the most exposed of all the big banks to SIVs, managing vehicles with about $80bn of assets. “Citi has made a lot of money over the years from these things and now they are asking us to come and help them out,” says one banker.

In an apparent reference to Citi, Jamie Dimon, chief executive of JPMorgan, said last week that there may be “asymmetric benefits” for the various parties involved in the plan.

Citi strenuously denies that its own SIVs are a problem. Since July, Citi has been “executing an orderly process” to fund the SIVs. More than $20bn of assets have been sold from the seven SIVs run by Citi Alternative Investments and it says that about 98 per cent of the assets are now fully funded until the end of the year.

“Citi has seen the market for third-party funding improve recently, with the SIVs raising more than $1.5bn of commercial paper funding from third-party sources in the last week,” it said in a statement.

It adds that the assets are of very high quality with no direct exposure to US subprime mortgages. “The SIVs have approximately $70m of indirect exposure to subprime assets through securities such as collateralised debt obligations. Those securities are AAA-rated and carry credit enhancements.” Citi does not own any of the SIVs’ equity capital which would be most exposed to further deterioration in asset values.

The proposed superfund would be helpful, but only “on the margin”, Gary Crittenden, Citi’s chief financial officer, said last week.

But sceptics point to the impact the SIVs are already having on Citi’s balance sheet.

Citi disclosed last week that it had been buying commercial paper from some of the SIVs and that this was one of the reasons that its balance sheet had deteriorated. Its Tier 1 capital ratio fell from 7.9 per cent to 7.4 per cent during the course of the third quarter, falling below its target of 7.5 per cent. A year ago it was 8.6 per cent.

Gary Crittenden, chief financial officer, said the decline was partly due to acquisitions, but also reflected the impact of assets taken on the balance sheet as a result of the credit squeeze, including commercial paper. He said it would continue to provide liquidity to the SIV on an arm’s length basis on commercial terms consistent with those provided by unaffiliated third parties. Citi has suspended share buybacks until its ratios return to more normal levels, expected early next year.

Some conspiracy theorists suggest that the US authorities are concerned that Citi’s exposure to the SIVs could restrict its ability to make new loans. But there are no signs that US banking regulators have any special concerns about Citi, other than the general worries about all banks’ appetite for lending in the interbank market. Citi executives point to significant new loan commitments in recent weeks and insist that it has huge potential lending capacity currently tied up in its securities trading business.

Citi has no contractual obligation to provide liquidity facilities or guarantees to any of the SIVs and says it will not consolidate the assets onto its balance sheet. But most observers believe it would not allow any of the SIVs to fail for reputational reasons. However, senior executives at other banks believe it could take on the assets without creating problems in terms of its regulatory capital, though that would expose it to the risk of another lurch down in US mortgage-backed securities.

However much Citi insists that it does not need the superfund, other banks have said they would be reluctant to contribute to a plan that would benefit Citi disproportionately.

But some have been mollified by indications from the lead banks that Citi would provide as much as a quarter of the financing of the superfund. Said one banker: “As long as they provide the lion’s share of the funding, we would consider supporting it.”

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