Not good enough for people, though!
"Banks’ Safety Net for Lenders May Have Holes in It" by VIKAS BAJAJ
Suppose your credit card companies demanded that you pay off your balances in full by month’s end and that you not use your cards for the foreseeable future.
If your family is like the many American households that rely on revolving credit, such a request could cause severe financial pain. It may force you to sell a car or rely on a rich relative. Longer term, you may have to reduce your spending significantly.
Far-fetched as that may seem, it is analogous to the situation that a group of financial enterprises known as structured investment vehicles are facing. Created about 20 years ago by American and European banks, these vehicles, known in the industry as SIVs, have become middlemen that channel hundreds of billions of dollars from investors around the world to American home buyers, credit card users and corporations.
The danger that many of these would collapse and create ripples in the economy by making it more expensive for consumers and businesses to borrow raised alarms at the Treasury Department a month ago.
At its prodding, three large banks announced Monday that they would start a fund to serve as buyer of last resort for SIVs that were forced to sell billions in bonds and other debts linked to mortgages, credit card balances and other loans.
Depending on how popular the fund is, it could end up with a large share of the SIV’s outstanding balance of $320 billion.
On Wall Street, reaction to the proposal has been less then enthusiastic. Stock gauges have weakened. The Standard & Poor’s 500-stock index, which set a record a week ago, has fallen 1.5 percent since the plan was announced, in part because of weak earnings reports from companies like Citigroup and Ericsson. Treasury prices have risen as investors have sought the safety of government-backed debt.
Many investors and analysts describe the fund as a stopgap that will relieve some pressure but not address more intractable problems with mortgage securities held by the structured investment vehicles.
“It’s very much a partial fix,” said Ethan S. Harris, chief United States economist for Lehman Brothers. But he said that when combined with the efforts of the Federal Reserve, which has cut interest rates and stepped up lending to financial institutions, the fund should be “an important cushioning of the blow to the capital market.”
“There is still a shock to the economy, but it’s a lot less than it was,” Mr. Harris said.
It remains unclear how much of the economic problems that started in the housing market with subprime loans to people with weak credit have been alleviated or forestalled by these various interventions. In speeches this week, Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve chairman, Ben S. Bernanke, acknowledged that the housing market was continuing to weaken.
The barometers that analysts use to evaluate the health of the market and the economy are providing conflicting and tentative signals. The premium that investors demand to hold risky loans rather than government-backed debt has narrowed since early September, but it remains far wider than it was at the start of the year.
“The trend is still to recovery, but it’s not a straight line up,” said Andrew Feltus, a bond portfolio manager at Pioneer Investments in Boston.
Another indicator, the price of insurance on corporate bonds, worsened — suggesting that investors were more worried than they were before the fund was announced, said Ed Rombach, a derivatives market analyst at Thomson Financial. “Judging by the reaction in the market, it has reminded people that there is a problem out there.”
People involved in the discussions that led to the fund’s creation are hoping that it eases investors’ anxiety by providing greater demand for the bonds held by the structured vehicles, many of which have not been actively traded since the credit market tightened in late July and early August. Investors have avoided the securities out of concern that they may contain risky loans made to homeowners and that their credit ratings may have been formulated on the basis of overly optimistic assumptions.
Deborah A. Cunningham is a senior vice president who oversees taxable money market accounts at Federated Investors of Pittsburgh, which was involved in the negotiations about the fund as an investor that lends money to SIVs. She acknowledged that some vehicles did overextend themselves in subprime mortgages, but said that most invested in much healthier bonds that have been tarnished in a rush to judgment. Some problems were brought on, she said, by SIV operators’ not fully disclosing their holdings.
Ms. Cunningham said the group that created the fund, which is known as the Master Liquidity Enhancement Conduit, is hoping that the fund’s mere creation will provide some comfort to investors. “The Treasury Department will consider this an extreme success,” she said, “if this is never, ever funded — if it’s never needed.”
It is too early to judge if that might be the case. Trading in mortgage and other bonds and securities, which the vehicles may be forced to sell, remains anemic. At the same time, their ability to finance themselves by issuing short-term loans known as commercial paper has not improved appreciably.
Investors are waiting for more details to emerge, and weak earnings reports from big banks have clouded any upbeat news, said Alex Roever, an analyst at JPMorgan Chase who has followed the agreement but is not involved in it.
Any narrowing in the premium that investors demand to hold commercial paper rather than government debt as a result of the fund’s creation, he said, “is not really noticeable.”
