Super SIV may hurt more than help(ZT)

Bankers wary of investment fund rescue effort
Sat Oct 20, 2007 7:23pm ET
By Thomas Atkins and John Poirier

WASHINGTON(Reuters) - Bankers remain wary of plans to launch a massive investmentrescue fund to soften the blow of the U.S. subprime meltdown, saying itcould interfere with a market recovery and stall a resolution to thecredit crisis.
Carl Stalberg, executive chairman of Swedbank(SWEDa.ST: Quote, Profile , Research), said on Saturday he doubted thefund would be an effective way for banks to liquidate billions ofdollars in structured debt in markets where buyers have effectivelygone on strike.
"It might be better to let the markets work it out.Trading platforms like that are always a difficult task," Stalberg toldReuters on the sidelines of a banking conference.
Stalberg spokeone day after a meeting of finance officials from the Group of Sevenrich nations where U.S. Treasury Secretary Henry Paulson lobbied insupport of the plan, which aims to restore confidence in the financialsector.
Bank of America Corp (BAC.N: Quote, Profile , Research),Citigroup Inc (C.N: Quote, Profile , Research) and JPMorgan Chase &Co (JPM.N: Quote, Profile , Research) announced on Monday plans tocreate the multibillion dollar fund, which was hatched with the U.S.Treasury's blessing.
The fund is intended to prevent bank-affiliatedStructured Investment Vehicles, or SIVs, from dumping billions ofdollars of bonds linked to subprime mortgages and other debt back intofinancial markets.
But despite the U.S. government's active role inseeking support for the plan, many bankers and investors remaincautious -- with some saying they have nothing to gain byparticipating. "Markets are rather suspicious about that policy. Itcould interfere with the market mechanism and introduce biases," saidOlivier Garnier, deputy general manager at Societe Generale AssetManagement.
The scope of the losses won't be clear until buyersregain confidence, he said, and then the holders of the assets willlikely have to face up to losses.
"Once liquidity returns andimpaired assets can be marked to market, some investors or financialinstitutions will see the true losses and will be forced to sell anddeleverage further," Garnier said.
TO FLY
Nor has the regulatorycommunity unanimously endorsed the idea, with Britain's financialwatchdog saying it was up to banks themselves to decide whether toparticipate.
"It will either fly or it won't fly. We watch it withinterest and we will see what will happen," said Callum McCarthy,chairman of Britain's Financial Services Authority.
Perhaps thesharpest indictment came from Alan Greenspan, the former chairman ofthe U.S. Federal Reserve, who said the fund may hurt more than help.Greenspan told Emerging Markets magazine the fund runs the risk offurther undermining already brittle confidence in besieged markets.
Bankof Canada Governor David Dodge, in contrast, offered a vote ofconfidence, calling the scheme a "very sensible idea" that could buytime and prevent a potentially destabilizing dumping of assets.
"Whetherthe particular proposition as it is now formulated in New York is theone we'll end up with, who knows, but the fundamental idea is probablya good idea," he said.
U.S. Treasury officials had brokered talksamong big banks that led to the plan to create the fund. Bankersattending a meeting of the global banking lobby Institute ofInternational Finance said the Treasury was continuing those effortsquietly.
The key issue -- and where many say the fund may be stalled-- is whether the fund can accurately price the assets that are placedwithin it.
"The real test is whether you have other stakeholders whoare willing to join the founders, because the big issue is theappropriateness of the pricing," said Pierre Cailleteau, chieffinancial policy analyst for Moody's Investors Service.
Afire-sale of assets could lift borrowing costs globally, trigger biglosses among investors and force banks to further write down someholdings on their balance sheets. In the worst-case scenario, suchsales could tip the United States or Europe into recession.
(Additional reporting by Louise Egan and Glenn Somerville)