Friday, September 07, 2007

SIVs in the Citi

So what’s the deal with Citigroup’s SIVs?

On Thursday afternoon, GMT, Citi released its latest figures for the seven SIVs it operates. Together, those seven SIVs corner 25 per cent of the SIV world - with just over $100bn in assets under management.

According to the WSJ:

The problem facing SIVs isn’t the assets they own, which can include securities underpinned by U.S. subprime loans — often mortgages to home buyers with sketchy credit histories. Rather, they can’t raise money because investor demand for commercial paper sold by SIVs is minimal.That means banks such as Citigroup are facing questions as to whether they will step in to provide financial support for the SIVs.

But Citigroup issued a statement with their figures saying that the credit quality of their SIVs remained “very strong” and all had succeeded in funding themselves through August, despite turmoil in the short-term commercial paper markets.

Indeed, the effects of that turbulence vary from one SIV to another. If, like the seven Citi vehicles, you’ve got a big bank behind you, finding buyers for your CP may not be so hard.

The WSJ may insist the trouble with SIVs “isn’t the assets they own” - volatility in the commercial paper market has indeed been the proximate cause of most SIV troubles - but SIV portfolios have been suffering severely too. Cheyne Finance, for example, went under because of a decline in its portfolio’s net asset value (NAV). And Thursday’s 7 rating actions by Moody’s were all a result of NAV declines.

But of course, portfolio trouble isn’t the problem most SIVs are keen on you reporting. Perhaps that’s because negative speculation about portfolio value could make shifting their CP even harder.

In a letter seen by the Journal, Citigroup’s SIV overseers, Paul Stephens and Richard Burrows, said that:

Quite simply, portfolio quality is extremely high and we have no credit concerns about any of the constituent assets… SIVs remain robust and their asset portfolios are performing well.

But look at the filings with the London Stock Exchange and you will see that Citi’s SIVs have seen declines in portfolio net asset value of 17-20 per cent in the past few months. That doesn’t quite sit comfortably with Stephens and Burrows assertion that “asset portfolios are performing well”.

Citi’s SIVs certainly do contain some very strong assets - their direct subprime exposure is accordingly, minimal, and a large chunk of their portfolios is rated highly. SIV managers are trying to stress the quality of their portfolios over their current values. But in a market such as this, that doesn’t necessarily matter, because a whole range of assets are suffering from contagion and fear.

As Mark Fitzgibbon, director of research at Sandler O’Neill & Partners, also told the journal:

Any off-balance-sheet issues are traditionally poorly disclosed, so to some extent, you’re dependent on the insight that the management is willing to provide you and that, frankly, is very limited.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.