When the country's three largest banks reached agreement on Friday on how to structure a US$75 billion fund to prop up distressed securities, an exhausted group of its top planners gathered in a Bank of America conference room to toast their success with 12-packs of Bud Light. But the celebration might have come too soon.
Having settled on the fund's composition, officials from Bank of America, Citigroup and JPMorgan Chase will now have to raise more than US$60 billion of the fund from dozens of financial institutions around the globe in the next few weeks. The goal is to have the fund operating by the end of the year. But the big question is: Will it actually help?
The answer, some analysts and big investors say, is probably not much. The backup fund will not save troubled structured investment vehicles (SIVs) that hold billions of dollars in packaged loans, though it could delay their demise. It may help calm the turbulent credit markets by preventing a sharp sell-off of securities, though analysts say the fund will probably not be able to offset the deteriorating prices of the securities.
Banks, meanwhile, may benefit if the backup fund can reignite trading in the packaged loan market and keep SIV assets from bogging down their own balance sheets.
"It is quickly being realized that it doesn't really solve the problems," said Joshua Rosner, a managing director at the research firm Graham Fisher & Co who had been skeptical of the proposal.
"The path they have taken of skimming off the cream from the top doesn't resolve the fact there is poison at the bottom," he said.
The fund will not help troubled SIVs survive. Nor is it intended to do so. Rather, it is meant to help set a market price for the securities they hold.
SIVs are entities created by banks and hedge funds that own pools of home, auto and credit card loans. They became a booming business, dependent on easy credit from investors as well as confidence in the packaged loans they bought.
Now this business model is ailing, because both are in short supply. And the backup fund may not cushion the blows as much as originally thought.
For one, the credit markets have worsened since the proposal was set in motion with the assistance of the US Department of the Treasury in September. And some of the technical details of the way the backup fund is to be structured could limit its impact.
First, the three banks have committed to put up only around US$5 billion to US$10 billion each, leaving the remaining portion of the US$75 billion to be funded by other financial institutions, according to a person involved with the plan. The 30 or so remaining SIVs have about US$250 billion in assets they need to unload in the coming months. That suggests the backup fund will not be a meaningful purchaser of last resort, even if it wanted to.
Where the fund may have an impact is in stabilizing the financial markets, though only to a point.
The fund will not purchase the most distressed assets in the SIVs. Bank organizers agreed that it would not accept any subprime mortgage-related assets or many types of risky, complex instruments like collateralized debt obligations.
But the criteria mean that SIVs, or the banks that sponsor them, will be left holding their most battered securities or worse -- they may be forced to sell them at fire-sale prices.
Meanwhile, the backup fund is expected to charge SIVs a fee of up to 1 percent for participation, making it prohibitively expensive for them. In fact, most SIVs have already unloaded their securities on their own, working on the assumption that it would not work or is only a last resort.
With capital positions already weak from unsold leveraged loans, mortgage-related securities and other assets they have not been able to sell, they may be forced to tighten up other forms of lending. The backup fund is intended to help them avoid that.
"Will this resolve the basic issue of the assets of the SIV trading below what they were originally?" asked Steven Abrahams, the chief interest-rate strategist at Bear Stearns.
"No, it defers the day of reckoning," he said.
Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) on Wednesday said that a new chip manufacturing technology called “A16” is to enter production in the second half of 2026, setting up a showdown with longtime rival Intel over who can make the fastest chips. TSMC, the world’s biggest contract manufacturer of advanced computing chips and a key supplier to Nvidia and Apple, announced the news at a conference in Santa Clara, California, where TSMC executives said that makers of artificial intelligence (AI) chips will likely be the first adopters of the technology rather than a smartphone maker. Analysts said that the technologies announced on
NO RECIPROCITY: Taipei has called for cross-strait group travel to resume fully, but Beijing is only allowing people from its Fujian Province to travel to Matsu, the MAC said The Mainland Affairs Council (MAC) yesterday criticized an announcement by the Chinese Ministry of Culture and Tourism that it would lift a travel ban to Taiwan only for residents of China’s Fujian Province, saying that the policy does not meet the principles of reciprocity and openness. Chinese Deputy Minister of Culture and Tourism Rao Quan (饒權) yesterday morning told a delegation of Chinese Nationalist Party (KMT) lawmakers in a meeting in Beijing that the ministry would first allow Fujian residents to visit Lienchiang County (Matsu), adding that they would be able to travel to Taiwan proper directly once express ferry
CALL FOR DIALOGUE: The president-elect urged Beijing to engage with Taiwan’s ‘democratically elected and legitimate government’ to promote peace President-elect William Lai (賴清德) yesterday named the new heads of security and cross-strait affairs to take office after his inauguration on May 20, including National Security Council (NSC) Secretary-General Wellington Koo (顧立雄) to be the new defense minister and former Taichung mayor Lin Chia-lung (林佳龍) as minister of foreign affairs. While Koo is to head the Ministry of National Defense and presidential aide Lin is to take over as minister of foreign affairs, Tsai Ming-yen (蔡明彥) would be retained as the nation’s intelligence chief, continuing to serve as director-general of the National Security Bureau, Lai told a news conference in Taipei. Koo,
MANAGING DIFFERENCES: In a meeting days after the US president signed a massive foreign aid bill, Antony Blinken raised concerns with the Chinese president about Taiwan US Secretary of State Antony Blinken yesterday met with Chinese President Xi Jinping (習近平) and senior Chinese officials, stressing the importance of “responsibly managing” the differences between the US and China as the two sides butt heads over a number of contentious bilateral, regional and global issues, including Taiwan and the South China Sea. Talks between the two sides have increased over the past few months, even as differences have grown. Blinken said he raised concerns with Xi about Taiwan and the South China Sea, along with China’s support for Russia and its invasion of Ukraine, as well as other issues