by Calculated Risk on 12/04/2007 12:01:00 AM

From the WSJ: SIV Exposure Seen at Some Money Funds

Funds recently holding some of the SIVs include some from Barclays PLC's Barclays Global Investors; UBS AG; Charles Schwab Corp.; Deutsche Bank AG; BNY Hamilton Funds and Morgan Stanley.
...
The funds range in asset size from $2 billion to $36 billion, and hold about 1% to 2% of their investments in some of the SIVs.
...
Among funds holding SIVs is the $29 billion Western Asset Money Market Fund, run by a unit of Legg Mason Inc. The fund holds a SIV called Orion Finance, which was on Friday downgraded by Moody's. Orion represents about 0.5% of the fund.

A Legg Mason spokeswoman said in an email that the company is confident in the stability of the fund's net asset value. "By and large, SIVs are paying on time, and Legg Mason's money funds' exposure to SIVs continues to come down as paper matures and pays."

It is extremely unlikely that any of these funds will "break the buck". However the last comment is important for the SIVs: everyone wants to reduce their exposure to SIVs as the paper matures.

by Calculated Risk on 12/03/2007 06:11:00 PM

A quick note: Blogger has an issue with graphs and images. When you click on the graph, instead of opening a larger image in the browser, blogger asks you if you want to download a file. This is a known issue with blogger, and they are currently working on the problem.

Meanwhile there is a somewhat tedious work around. I believe I've fixed the graphs in the following two posts:

Krugman: 15% House Price Decline "Implausible"

House Prices and Foreclosures, Massachusetts

Sorry about that ... Best to all.

by Calculated Risk on 12/03/2007 02:54:00 PM

From Bloomberg: WestLB, HSH Nordbank Bail Out $15 Billion of SIVs (hat tip Brian)

WestLB AG ... and Hamburg-based HSH Nordbank AG provided financing to more than $15 billion of troubled investment funds to prevent a fire sale of their assets.

WestLB provided a credit line for its $11 billion structured investment vehicle called Harrier Finance to repay commercial paper, the Dusseldorf-based bank said in an e-mailed statement today. HSH Nordbank said it will provide backup funding to cover all commercial paper issued by its 3.3 billion- euro ($4.8 billion) Carrera Capital SIV, spokesman Reinhard Schmid said in an interview.

To understand these stories, it helps to understand the structure of an SIV (Structured Investment Vehicle). (see SIV Accounting for more)

First an SIV has investors - like hedge funds or wealthy individuals - who invest say $1 Billion in the SIV (the equity). Then the SIV issues commercial paper (CP) and medium-term notes (MTN) that pay slightly higher rates than similar duration paper. The typical SIV, according to Fitch, uses 14 times leverage, so in our example the SIV would sell CP and MTN for $14 Billion.

Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short, lend long, hedge the interest rate and credit risks - and the profits flow to the investors in the SIV.

Back to the story: what happens when the CP comes due and no one wants to buy any more? To cover the CP, the SIV might have to sell the longer term assets at a steep discount, and this would trigger a liquidation of the entire SIV. To prevent this "fire sale", the sponsoring banks stepped up and provided the financing to cover the expiring CP.

Of course this limits the banks ability to make other loans (aka Credit Crunch). Perhaps this story is related: Banks Urge UK Clients To Stop Borrowing (hat tip FFIDC)

The banks are urging some of their biggest clients not to draw on standby credit facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability to fund themselves.

by Calculated Risk on 12/03/2007 02:07:00 PM

Ahhh, I'm reminded of Tanta's post in early June: Reelin' In the Suckers

Once again, from David Evans at Bloomberg: Montana, Connecticut Hold SIVs Downgraded, Reviewed by Moody's (hat tip energyecon)

Montana and Connecticut state-run investment funds hold debt tainted by the subprime mortgage collapse that was cut or put under review by Moody's Investors Service, leaving local governments vulnerable to losses.

... Montana owns $50 million of the paper. Moody's put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records show.

``This just reinforces the fact that we have a serious issue,'' said State Senator Dave Lewis, of Helena, Montana, a member of the Legislative Audit Committee.
...
The Montana pool, managed by the Montana Board of Investments, has 25 percent, or $550 million, invested in SIVs, all of which carried top investment ratings when purchased.
...
Connecticut's Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody's. The state's $5.8 billion fund held notes issued by SIVs affiliated with Citigroup ...

Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.

More bagholders found.

by Calculated Risk on 12/03/2007 12:39:00 PM

From the Boston Fed: Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures

... house price appreciation plays a dominant role in generating foreclosures. In fact, we attribute most of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005.

Click on graph for larger image.

From the linked Fed paper, this figure compares the foreclosure rate in Massachusetts with changes in house prices. As prices rise, the foreclosure rate falls, since homeowners in trouble can either sell or refinance their homes. As prices fall, there is no way out - except foreclosure - for homeowners facing difficulties.

Last week I graphed the historical relationship for California: House Prices and Foreclosures. The pattern was the same.

Forget resets (although they are important). As prices fall over the next couple of years (or longer), foreclosures will rise, with or without resets. And a real concern is that it will become socially acceptable for underwater prime borrowers to just mail their keys into their lender (what Fleck calls "jingle mail").