Tuesday, October 23, 2007

Superfund, SIVs, and Firesales

Having been declared bankrupt, despite sitting on a cash balance of $1.3bn (a "technical" insolvency one lawyer told me), the Cheyne Finance structured investment vehicle (SIV) has found a saviour in the Royal Bank of Scotland.

According to the FT if RBS can refinance the SIV, it will be rescued. Furthermore, the FT opines

"A successful deal would mark the first time an entire SIV portfolio has been sold and is likely to provide hope for the other vehicles controlling more than $40bn in assets that have had their debt downgraded by ratings agencies. It would also demonstrate another possible method of avoiding a firesale of assets from the SIV sector, after the mooted plans for a super-SIV being promoted by Citigroup, JPMorgan and Bank of America."

All of this looks good and augurs well for the financial services industry. I noted in my previous posting that SIVs were not going to be well helped by the new Superfund. But if others can pitch in so much the better.

But perhaps the glasses are tinted too rosily. This deal has a sting:

"No price range has been disclosed for the deal but it is highly likely that the value of the junior creditors’ notes and some part of the mezzanine, or middle-ranking, creditors’ notes will be wiped out, according to those involved."

In other words the high risk elements are not being saved. The junk will be just that. It begins to sound more like a firesale to me than otherwise. Pick out the good bits and dump the rest. Maybe some distressed debt traders will buy, but no one seems to be really developing a market.

Given the unpredictability of the rescue culture that's growing up, if the SIVs start to unwind, we have no way of knowing how far the mess will spread. We know it doesn't take much to initiate panic in the markets. A fairly obscure sector of the mortgage market (subprime) wobbling has demonstrated that most lucidly. It looks possible something similar could recur if rescuers don't think beyond high class assets. Of course not all junk is worth saving but not all of it is worthless. If efforts are made to develop a secondary market in distressed debt, it might save considerable pain that will reverberate around some economies for years to come.

We have lost the commonality of cause that was apparent in the London Approach. The number of players in the market has multiplied enormously and any effort at coordination will run into tremendous difficulties. And it seems in the UK at least that the regulatory institutions have shied away from proactive behaviour under the guise of creating moral hazard.

But this is how rescue cultures have evolved and emerged: crisis begets solutions. It occurred with the collapse of Barings in the 19th century; it occurred with the collapse of the secondary banking market in the 1970s; and it occurred with the collapses of the property markets and technology markets in the late 20th and early 21st centuries.

For some reason the impetus doesn't appear as strong this time. While this is not a plea for more formal regulation--it won't work--more informal creativity is called for.


1 comment:

John Flood said...

The rescue by RBS isn't working. It seems the debt holders don't like losing because the haircuts they are being asked to take are too severe. So if the Superfund won't buy this debt and RBS won't pay the asking price, who will buy?