So this is the way the great Citigroup SIV debacle ends: not with a bang but a whimper. From the start Citi seemed either delusional or dishonest about it’s SIVs, which at one point made up a quarter of the entire world of these off-and-on again balance sheet sleights of hand. Now Citi has revealed that it will finally kill the SIVs, buying their remaining $17.4 billion assets and putting them to rest once and for all.
Citi’s shares are down 23% for the day, all the way down below $6.50. The company, in short, is getting absolutely crushed. Volume today has been almost twice the average. Institutional investors are no doubt cashing out. We imagine that Sheila Bair has to be on the phone with Citi chief executive Vikram Pandit today because she knows depositors are likely to panic when they see shareholders sell off this quickly.
It’s all been one big embarrassment for Citi. When credit was cheap and easy, investors eagerly bought pieces of SIVs in the Great Yield Hunt. The SIVs typically borrowed short and bought long. More specifically, they issued short-term commercial paper and used the proceeds to buy long term debt, including mortgage-backed securities.
This all worked nicely until lenders began to lose confidence in the quality of the assets held by the SIVs. The commercial paper that was their lifeblood became extremely expensive, if not entirely unavailable.
When they were hatched somewhere in the off-shore laboratories of Citi, the SIVs were off balance-sheet. This concealed what turned out to have been real risks from potential investors. Most people thought such off balance-sheet chicanery had ceased after the post-Enron accounting and regulatory reforms of the early years of this century.
When the credit crunch got under way last fall, Citi at first insisted it had no obligation to take on the SIVs and no intention of doing so. But that was probably never true. When it came down to allowing the SIVs to fail, Citi lent them money and eventually took them on balance sheet.
Yet somehow, Citi continued to maintain that it was responding to “temporary market conditions.” It claimed that the long-term debt held by the SIVs, 28% of which was mortgage related, was still sound. Citi sought to avoid selling any SIV assets because that would result in steep losses. It thought it could simply keep funding the SIV with a strategy of holding the assets until market improved. Those “temporary market conditions” have now stretched out longer than a year and a half, proving once again that the market can stay awful longer than you can stay solvent.
All sorts of plans were hatched to rescue the SIVs. Perhaps the grandest was a liquidity syndicate of the major banks that was given the evil sounding name MLEC. None of them worked. Finally, it seems, the SIVs have been allowed to go the way of all things.
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