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.
RETHINK? The defense ministry and Navy Command Headquarters could take over the indigenous submarine project and change its production timeline, a source said Admiral Huang Shu-kuang’s (黃曙光) resignation as head of the Indigenous Submarine Program and as a member of the National Security Council could affect the production of submarines, a source said yesterday. Huang in a statement last night said he had decided to resign due to national security concerns while expressing the hope that it would put a stop to political wrangling that only undermines the advancement of the nation’s defense capabilities. Taiwan People’s Party Legislator Vivian Huang (黃珊珊) yesterday said that the admiral, her older brother, felt it was time for him to step down and that he had completed what he
Taiwan has experienced its most significant improvement in the QS World University Rankings by Subject, data provided on Sunday by international higher education analyst Quacquarelli Symonds (QS) showed. Compared with last year’s edition of the rankings, which measure academic excellence and influence, Taiwanese universities made great improvements in the H Index metric, which evaluates research productivity and its impact, with a notable 30 percent increase overall, QS said. Taiwanese universities also made notable progress in the Citations per Paper metric, which measures the impact of research, achieving a 13 percent increase. Taiwanese universities gained 10 percent in Academic Reputation, but declined 18 percent
BULLY TACTICS: Beijing has continued its incursions into Taiwan’s airspace even as Xi Jinping talked about Taiwan being part of the Chinese family and nation China should stop its coercion of Taiwan and respect mainstream public opinion in Taiwan about sovereignty if its expression of goodwill is genuine, the Ministry of Foreign Affairs (MOFA) said yesterday. Ministry spokesman Jeff Liu (劉永健) made the comment in response to media queries about a meeting between former president Ma Ying-jeou (馬英九) and Chinese President Xi Jinping (習近平) the previous day. Ma voiced support for the so-called “1992 consensus,” while Xi said that although the two sides of the Taiwan Strait have “different systems,” this does not change the fact that they are “part of the same country,” and that “external
UNDER DISCUSSION: The combatant command would integrate fast attack boat and anti-ship missile groups to defend waters closest to the coastline, a source said The military could establish a new combatant command as early as 2026, which would be tasked with defending Taiwan’s territorial waters 24 nautical miles (44.4km) from the nation’s coastline, a source familiar with the matter said yesterday. The new command, which would fall under the Naval Command Headquarters, would be led by a vice admiral and integrate existing fast attack boat and anti-ship missile groups, along with the Naval Maritime Surveillance and Reconnaissance Command, said the source, who asked to remain anonymous. It could be launched by 2026, but details are being discussed and no final timetable has been announced, the source