If SIVs struck an iceberg this summer, then Wall Street’s M-LEC superconduit plan is a bit like rearranging the deckchairs on the Titanic. The Master Liquidity Enhancement Conduit, in its $75bn entirety, raises far more questions than it answers. As Lex points out, suspicions are running high.
If you haven’t caught the details already, M-LEC is a joint scheme by Citigroup, Bank of America and JPMorgan to buy up assets from the banks’ troubled SIVs. Comparisons are being drawn with the Japanese banking sector ten years ago - when the country’s banks similarly clubbed together in an abortive attempt to limit asset-price collapses.
But M-LEC is not a sure-fire way of getting the ABCP paper markets moving again - as some are optimistically suggesting. It’s a bit like moving food you don’t want to eat around a plate. While MLEC might be a good way for existing SIVs to delever and meet their upcoming redemptions, it’s still going to have its own paper to place. Who’s going to buy that?
Ahah! Well, one thing that will make M-LEC ABCP more attractive, say the scheme’s arrangers, is the fact that the super-conduit will only be backed by AAA or AA securities.
But if banks are only going to sell AAA and AA securities to MLEC, where does that leave banks’ existing SIVs? They’ll end up with an even higher proportion of assets invested in the dodgier end of the MBS spectrum. While the Lord & Lady Astors of this world are lifeboat bound, steerage are still on board a sinking ship. Are the banks cutting their losses? Shifting the assets they can and leaving their other SIVs to flounder?
With the M-LEC, as well, reputational risk could be lowered. If something goes awry, fingers won’t - can’t - be pointed at any institution in particular. And there’s the fact that MLEC will give a “market price” for assets it buys - how could it not, say the banks - insisting that their consortium partners will ensure fairness. Be gone suspicious accounting.
Finally, there’s the “why now” question. What has precipitated the move by the banks? Figures from Merrill indicate that banks took $280bn of assets back onto their balance sheets over the summer, so why now the sudden move to put them into a communal white-elephant? And SIVs have been successfully restructured - Barcap turned Cairn into a CDO.
In one sense, perhaps, it’s all just a confidence trick: MLEC will succeed or fail on whether it inspires confidence. Co-operating in this way, banks are trying to remove that nasty element of suspicion from the market. Trouble is, they might not succeed in addressing the cause of that suspicion in the first place.