In previous posts, I’ve speculated that the MLEC Super-Conduit proposed by Treasury and a consortium of major banks is intended to operate as a Vulture Fund.<\/p>\n
It would appear from posts in Naked Capitalism (SIV Rescue Plan : From Smoke and Mirrors to Jawboning)<\/a> and Accrued Interest (Yeah, but who’s going to fund it kid? You?)<\/a> that my use of the term has been misunderstood; possibly because I’ve mis-used it.<\/p>\n The term “vulture fund” has been taken to mean that I am suggesting Super-Conduit will be, or should be, buying lower quality assets; below AA in Naked Capitalism’s<\/em> parlance, which is not what I had intended to suggest. It is my suggestion that Super-Conduit will seek to buy wonderful assets from distressed SIVs.<\/p>\n A recent publicly disclosed version of such a scenario is the Amaranth \/ Citadel deal<\/a>, in which Amaranth realized sufficient losses on energy trades that it couldn’t finance them any more and was forced – that’s the key word, forced – to sell … with unfortunate results:<\/p>\n Transferring the investments would prevent further losses and decreased its loans but the deal was done “at a price that resulted in additional significant losses,” it added.<\/p><\/blockquote>\n Right now,\u00a0we have SIVs like Cheyne Finance<\/a> and Rhinebridge<\/a> defaulting.\u00a0Defaulting!<\/p>\n They are doing this because, in the case of Rhinebridge:<\/p>\n The company suffered “a rapid decline in the portfolio value,” Fitch said. “The manager has determined that the market value of the remaining assets within the portfolio may be insufficient to meet the amount of outstanding senior liabilities.”<\/p>\n SIVs worldwide have been forced to sell about $75 billion of assets in the past two months to repay maturing debt as investors balked at buying securities linked to money-losing subprime mortgages. SIVs have different operating states to protect investors and allow the fund time to recover from a market slump. Enforcement is typically the last state, and is irreversible.<\/p>\n The assets in Rhinebridge’s portfolio are worth 63 percent of their $1 billion face value, having fallen $69 million in three days, S&P said. S&P also cut its ratings on the company’s debt to D for default.\u00a0<\/p><\/blockquote>\n In other words, it’s a market value assessment, rather than a credit assessment, of the underlying assets\u00a0 that is causing the problems. And we know that, for instance, prices of AAA paper have declined to ludicrous levels<\/a>:<\/p>\n Briefly, let me give you a few examples of events that I [William C. Dudley, Executive Vice-President, New York Fed]\u00a0never expected to see\u2014ever:<\/p>\n So\u00a0here’s the scenario, with what I propose is a plausible scenario for an ideal situation for the MLEC’s sponsors.<\/p>\n\n