There’s a certain amount of sense to this
idea: as Citigroup and other banks find themselves at the mercy of their
off-balance sheet structured investment vehicles, or SIVs, they should just
create one enormous pool with $100 billion or so in really hard-to-value structured
debt, which would be too big to fail, which could roll over its own short-term
obligations relatively easily, and which could act as a buyer of stuff which
no one else seems to want right now.
But boy is it going to be hard to work this one out in practice. For one thing,
there are going to be very tough negotiations on the subject of how best to
value the SIVs which will be rolled up into the new "superconduit":
Bank-affiliated SIVs selling assets into the superconduit will have to agree
on how to price those assets. Some SIVs may value the securities differently.
There have been several meetings since the initial Sunday meeting, both at
Treasury and in New York.
And then there’s the question of how to account for what sounds like explicit
guarantees from the banks creating it.
Because the superconduit would be backed by the big banks themselves, it’s
expected this would reassure investors and make them more willing to buy its
short-term debt, or commercial paper…
Two banks in the discussions with Citigroup, Bank of America Corp. and J.P.
Morgan Chase & Co., would participate not because they have SIVs — they
don’t — but because they would earn fees for helping arrange the superconduit,
according to people briefed on the discussions. The superconduit’s debt would
be fully backed by participating banks, they said.
How much capital would the Federal Reserve require that the banks set aside
to cover these guarantees? This could end up being a very expensive operation,
in terms of eating up shareholders’ equity, just as the banks are being increasingly
reintermediated and see big balance-sheet demands looming in the future.
If all these issues can be hammered out, however, with the help of some "moral
suasion" from Treasury, then this would be a great example of the banking
sector coming up with its own solution to a problem ultimately of its own making.
And if it costs enough to hurt then, frankly, so much the better.