[Texgreen] Visualize industrial collapse

[Craig Miller]

All of this will just be proof after proof that what we have is not a free
market system but a privileged elite that manipulates and controls this country.
 

- Craig




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---- On Tue, 16 Oct 2007, Roger Baker (rcbaker@eden.infohwy.com) wrote:

Master Liquidity Enhancement Conduit? Thats what they call the new  
thing the fed is helping to set up to preserve a system they claim is  
perfectly healthy, right?

"...some securities are almost impossible to sell anywhere near their  
previous prices. There is fear that allowing those securities to  
plunge in price could disrupt credit markets, alarm investors in  
everything from hedge funds to money market funds..."

In other words since dollars aren't really backed up by anything  
material, the health of the whole financial system depends on  
maintaining a certain optimistic psychology that prevents everyone  
from trying to cash in "some securities", largely SIVs, only to  
discover thats that there's no market there unless they can add a new  
layer of smoke and mirrors to try to maintain the expansionist  
psychology.

-- Roger, Austin


*********************************************************



Big U.S. Banks Try to Restore Confidence in Credit Markets

   By FLOYD NORRIS
Published: October 16, 2007

The biggest banks in the United States, with active encouragement
from the Treasury Department, unveiled a plan yesterday to keep the
housing-related debt crisis from worsening.

The plan calls for the banks to create a new financing vehicle to try
to restore confidence and reduce the risk of a market meltdown by
propping up an important part of the debt markets. But the banks hope
to take minimal risk and avoid actually investing any of their own
money.

Although credit markets have calmed in recent weeks, and the stock
market remains near record highs, some securities are almost
impossible to sell anywhere near their previous prices. There is fear
that allowing those securities to plunge in price could disrupt
credit markets, alarm investors in everything from hedge funds to
money market funds, and perhaps make it harder to borrow money,
making a recession more likely.

If the banks� initiative works as planned, many investors that helped
to finance risky loans � including supposedly safe money market funds
� will be spared distress. And the banks will collect fees for little
more than promising to make loans if no one else will.

�The idea is to avoid a fire sale of assets,� said one banker
involved in the initiative, who asked not to be identified because
negotiations on its terms are continuing.

The new entity, called a Master Liquidity Enhancement Conduit, or M-
LEC, could raise as much as $200 billion or more through the issuance
of its own securities, and use the money to buy securities that
otherwise might be dumped on the market.

The announcement by Citigroup, JPMorgan Chase and Bank of America
came on the same day that Citigroup reported a sharp fall in third-
quarter profits, with write-offs on troubled securities that were
substantially larger than it had forecast just two weeks ago. Other
financial institutions, including Merrill Lynch, have also had to
take substantial write-offs.

Though yesterday�s move was meant to reassure the markets, investors
reacted with doubt. The Dow Jones industrial average fell 108 points,
and financial stocks were among the worst hit.

�I don�t really see that this is going to make a significant
difference,� said Jan Hatzius, chief United States economist at
Goldman Sachs. �It seems a little more like a P.R. move, frankly.�

Mr. Hatzius said he wondered �why this is going on when previously
the official word was that things were getting better.�

The market upheaval that took hold in July arose from securities that
were supposed to be safe � and were certified as such by bond rating
agencies � even though they financed risky mortgages. Those
securities would not default unless a large portion of the underlying
loans went bad, and that was deemed unlikely. But in the wake of the
subprime mortgage crisis, questions have arisen about whether the
rating agencies were too optimistic.

The conduit could work brilliantly if it turns out that the collapse
in the market value of the securities represents market panic rather
than an accurate assessment of the likelihood of eventual default. If
this is the case, then prices will eventually return to normal and
this new creation will have bought time for that to happen.

In the meantime, it is hoped that what amount to bank guarantees of
some debt � coupled with the fact the Federal Reserve is the lender
of last resort for banks � will persuade investors like money market
funds to buy securities issued by the new conduit.

If they will not buy, or if the securities really do not prove to be
worth face value, however, little will have been changed.

Details remained in flux yesterday, but some were not persuaded that
the new structure would really do much. Josh Rosner, an expert in
mortgage-backed securities at Graham Fisher, an independent research
firm in New York, questioned why the banks needed to establish such a
vehicle.

�If they really believe these are good assets being mispriced in the
market,� he said, the banks could just buy them and wait for the
asset values to recover. �This raises the question of whether the
banks are doing this just to avoid taking their losses.�

But some hailed the move as a way of preventing a crisis without
directly involving the government, and said it reduced the so-called
moral hazard that comes when the government bails out those who made
risky bets, thus encouraging more foolish bets in the future. In this
case, the Treasury encouraged the talks, but neither offered to put
up money nor dictated the agreement.

�I don�t see this as a bailout,� said James Paulsen, chief investment
officer at Wells Capital Management. �There is no public money
involved in this. The government�s role here is facilitating
discussion among private players to take care of this themselves. If
the private players can find a way to help alleviate this, then why
shouldn�t they?�

At issue is a borrowing crisis facing a group of institutions known
as structured investment vehicles, or SIVs, that were little known
even to many on Wall Street until the credit crisis erupted this
year. These vehicles essentially are private banks, albeit ones
without the benefits of deposit insurance or the right to borrow from
the Federal Reserve. They lend long term, and borrow short term. If
they cannot borrow money, they are in trouble.

The vehicles, often started by banks like Citigroup, were financed by
issuing commercial paper, a form of short-term credit, for 90 percent
or more of the value of their securities. The expectation was that
the cushion of 10 percent or less would be enough so that the
commercial paper could readily be sold at low interest rates, often
to money market funds. Because commercial paper usually matures
within months, not years, it is necessary to sell new commercial
paper as the old paper is paid off.

Now, however, it is practically impossible to sell such paper, and
the SIVs are faced with the threat of having to sell many of their
securities into a market with few buyers. �It is in nobody�s interest
to see a disorderly sale of assets by the SIVs,� said Nazareth
Festekjian, a Citigroup managing director who was involved in
planning the conduit.

The proposal came about from discussions among the banks and the
Treasury Department, in which one idea considered was for the banks
to just purchase the commercial paper issued by the SIVs. But that
was rejected by some bankers, a person involved in the talks said,
and the conduit idea was developed.

The new conduit will offer to buy many of the securities owned by
SIVs, but at a cost to those vehicles. First they will have to pay a
fee for the right to sell anything to the conduit, and part of that
fee will be passed on to the banks, increasing their profits.

Most of the proceeds will be paid to the conduits in cash, which they
can use to redeem commercial paper. But a part of the payment,
perhaps 5 percent of it, will instead be in junior securities issued
by the conduit.

Because those securities would bear the first losses suffered by the
conduit, it is the SIVs, as a group, that will take the first risk
that the securities turn out to be worth less than the conduit pays.

�The same folks who brought you the SIV in the first place are now
repackaging them in yet another conduit," said Ed Yardeni, president
of Yardeni Research. �I guess they figured there�s strength in numbers.�

The conduit would raise money by selling what it calls senior
securities to investors who would be assured of payment unless losses
grew so large that the junior securities were wiped out. The rest of
the money would come from selling commercial paper, with the banks
promising to buy that paper if no one else would.


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