Sunday, October 14, 2007

Structured Investment Vehicles (SIVs) are NOT a threat to the economy

One of the most annoying "qualities" of the general media and even the financial media is an unhealthy willingness to act as a mere mouthpiece to promote vested interests. You can usually tell when this is happening when you hear a "reporter" spouting a "line" that has been fed to them by a vested interest without even the slightest pretense of investigating the veracity of the "line" being touted. A great example is the article in The New York Times by Eric Dash entitled "Banks May Pool Billions to Avert Securities Sell-Off" which does indeed report on an effort by the U.S. Treasury to help a group of banks and unnamed hedge funds to bail out their positions on so-called structured investment vehicles, known as SIVs. I found the article quite illuminating, until I got to the "line" being mouthpieced by the reporter:

The fear is that problems with these vehicles could infect the broader economy.

The article never did lay out a convincing scenario for how a sensible accounting of SIVs would "infect the broader economy."

The article does clue us in to the two key culprits who I suspect are behind this "story":

Analysts say that investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once. That would put intense pressure on prices. As Wall Street firms and hedge funds mark value of similar investments they held to their new lower values, they face potentially huge hits to their profits.

Ah yes, those sacred "profits." That is what this is all about, not the overall, mainstream economy, but protecting the already-outrageous profits of a few well-connected Wall Street firms.

The article does lay out an unsubstantiated claim:

Still, the impact on the biggest banks is even more severe. In times of crisis, they are committed -- either legally or to maintain their reputations -- to stepping in to buy those securities. Banks have already been buying significant amounts of commercial paper in recent weeks, even though they did not have to. But if they are forced to bring those assets onto their balance sheets, they might be less willing to lend to businesses and consumers. That could set off a credit crunch and thrust the economy into a recession.

That's the "claim", but the reporter appears to have done nothing to verify whether the claim holds up at all. Even if it is true that banks would have to take such securities onto their balance sheets, what is so wrong with that? Answer: It is those sacred profits again. Let the banks take the balance sheet and profit hit, and then the Federal Reserve can consider stepping in and providing whatever extra liquidity might be needed to keep credit flowing.

There is absolutely zero evidence that forcing Wall Street firms to clean up their own mess is somehow likely to lead to a credit crunch or recession.

This is a clear cut case of Wall Street firms demanding yet another free lunch.

There is plenty of demand for high-quality short-term commercial paper from money market funds. No Wall Street bailout is needed for high-quality commercial paper.

Let Wall Street clean up its own mess.

As far as this spurious claim that fixing up their balance sheets would make banks less willing to loan money, that is complete nonsense. Banks make a huge chunk of their profit from loans, so it would make no sense for them to want to walk away for such a cash cow. Hypothetically, adjustments to their balance sheets could reduce the amount of money available for loans, but no evidence has been presented to show that this would be any more than a very modest reduction at worst.

Most importantly, the reporter has done nothing to verify the bank claims. This story is all about vested interests, but the reporter has done nothing to challenge the truth of the claims of vested interests.

Besides, as even the reporter notes, this is really only a niche problem: "a pocket of the commercial paper market remains under siege."

In short, there is no evidence that structured investment vehicles (SIVs) are a "threat" to the overall economy.

-- Jack Krupansky

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