vers un fond socialisé des dettes pourries des grandes banques US

[vincponcet]

A la demande de Citi, une réunion entre les grandes banques US a été organisé par le directeur du trésor US.

L'idée : faire un fond qui achèteraient toutes les dettes pourries hors bilan des banques aujourd'hui contenues dans des SIVs.

Un SIV (Special Investment Vehicule) est une entité juridique généralement créé par une banque a qui elle ouvre des lignes de crédit afin de lui donner une certaine garantie du point de vue des investisseurs. Le SIV ne se sert pas de ces lignes de crédit, mais emprunte sur le marché court terme pour acheter des créances long termes, soit sur le marché soit à sa banque maison mère. càd qu'il emprunte court pour acheter long et ce, avec un capital assez faible par rapport à ses positions totales. Beaucoup de SIVs ont plus de 10 fois en dettes que leur capital. Ils sont en fait des hedge funds, mais soutenue et opérées par les banques. Ainsi, un SIV est une entité hors bilan créée par les banques afin d'échapper aux règlementations de la Banque Centrale qui la limite dans sa prise de risque. Ainsi, on a un système monétaire socialisé, mais avec plus aucune limite à la prise de risque individuelle. càd c'est l'open bar financier !

Les SIVs sont donc des gros émetteurs d' ABCP, les asset-backed commercial paper, ces titres de créances court terme (c'est comme une obligation mais en court terme, et résultat, ça échappe aux réglementations de la SEC, par contre, je crois que c'est plus surveillé par la FED). Les ABCPs sont notamment backés par des tranches de CDO pouvant venir de subprime. Ainsi, un crédit immo subprime peut être reconditionné pour être financé à court terme. à chaque fin de terme de la créance court terme, on réémet une autre et ce, tout le long de la durée de la créance long terme sous-jacente. On peut aussi avoir des créances de cartes de crédit, des crédits voitures, crédit conso. Mais aux US, tout peut être backé par une hypothèque sur sa maison. On a même des cartes de crédit révolving backée par une hypothèque immo.

Or, le marché des CPs et surtout des ABCPs, s'est cassé la gueule ( <a href="http://www.federalreserve.gov/releases/cp/" target="_blank">http://www.federalreserve.gov/releases/cp/</a> ), bien évidemment du fait que les préteurs court terme, principalement les money market fund, ne font plus confiance dans les CDOs, subprime ou non d'ailleurs, backant les ABCP vendus par les SIV. De manière générale, il y a un doute que les prix immo vont continuer à grimper, ils commencent même à diminuer, résultat la garantie hypothècaire pourrait bien valoir moins que la créance qu'elle a initialement backée.

Résultat, dans le cadre du fonctionnement d'un SIV, si il n'arrive pas à réémettre des CPs pour se financer, il doit utiliser les lignes de crédit de la banque, mais pour la banque, cela pose un gros pbs, parce qu'elle se retrouve avec du capital immobilisé, ce qu'elle devrait préter à ses SIVs, elle ne pourra plus le préter ailleurs. En plus, du fait des règlementations prudentielles prenant en compte le niveau de risque des créances, vu que les collatéraux type immo tombent en valeur, ça augmente d'autant plus le capital qu'elle doit immobilier pour cela (capital requirement).

Bref, c'est la merde pour les banques. Et la solution trouvée, est d'organiser avec l'Etat, un gros fond qui récupère toutes ces créances pourries aujourd'hui illiquides en créant un super SIV à l'échelle de toutes les banques.

ainsi si un ABCP de ce SIV est équivalent à un prêt à l'ensemble du système bancaire. Ils espèrent ainsi que les préteurs vont préter moins cher à ce truc qu'aux banques individuellement.

Parce du point de vue du préteur, ce conduit à moins de risque. On peut même supposer qu'il est vraiment "too big to fail" et que la garantie du trésor ou de la fed, est forcément admise comme implicite du point de vue des potentiels préteurs.

Je n'ai pas encore tout compris comment ce fond va être financé. C'est assez flou.

et le nom de ce super "fond" ? The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC. rien que le nom, ça fait peur…

Là, c'est clair, c'est une banque qui demande au trésor d'organiser la socialisation des dettes pourries qu'elles ont consenties.

Aussi étonnament, il semblerait que les négos courent depuis 3 semaines et on apprend ça uniquement ce samedi, juste avant la publication des comptes de Citi qui ont lieu lundi, étonnant, non ?

C'est comme l'exemption de la réglementation 23A de la FED, elle n'a pas été donnée aux banques, la FED ne fait que répondre à une demande des banques : <a href="http://www.federalreserve.gov/boarddocs/le…eserveact/2007/" target="_blank">http://www.federalreserve.gov/boarddocs/le…eserveact/2007/</a>

Cette réglementation limite la proportion de prêt qu'une banque peut consentir à une de ses filiales. En l'occurrence, la levée de 23A permet aux banques de fournir plus de capacité de leverage aux marchés financiers via leurs filiales de brokering et ainsi doper les cours de bourse. les collatéraux des opés de leverages sont ensuite redirigées par les banques vers le discount window que la fed a ouvert récemment à des collatéraux plus exotiques qu'à l'habitude ( <a href="http://www.frbdiscountwindow.org/cfaq.cfm?…dtlID=?hdrID=21" target="_blank">http://www.frbdiscountwindow.org/cfaq.cfm?…dtlID=?hdrID=21</a> ). Ainsi la fed injecte indirectement dans les bourses.

Certains diront encore que les banques sont des purs entrepreneurs qui assument leurs responsabilités etc… etc…

<a href="http://www.ft.com/cms/s/0/684b16de-7919-11…?nclick_check=1" target="_blank">http://www.ft.com/cms/s/0/684b16de-7919-11…?nclick_check=1</a>

Banks in ‘super-conduit’ proposal

By Saskia Scholtes in New York

Published: October 13 2007 03:30 | Last updated: October 13 2007 03:30

US banks are in close discussion with financial regulators to resolve a liquidity crisis in the market for commercial paper, said sources close to the situation.

The scheme is intended to help bank-sponsored investment vehicles known as “conduits” or “structured investment vehicles” (SIVs) that obtain their funding via the commercial paper markets, but have struggled in recent weeks as a result of the credit squeeze.

The banks are planning to band together to create a single “super conduit” that would pool the ailing investment vehicles, dispersing the risk among all the banks. This could then help ease the liquidity squeeze in the short-term debt markets by easing fears that any such vehicle could implode, hitting the rest of the market.

Citigroup is one leader of the proposal. The bank has seven such affiliated vehicles with nearly $100bn in assets.

SIVs invest in long-term, and often thinly traded assets ranging from credit card debt and residential mortgages. Demand for such asset-backed commercial paper dried up during the credit squeeze as investors recoiled from complex structured products and subprime mortgage-related assets.

As such, the market for asset-backed commercial paper has shrunk by more than 20 per cent over the past two months, according to the Federal Reserve.

This forced many SIVs to tap their sponsoring banks for cash to fund their liquidity shortfall, and has contributed to elevated interbank lending rates based on concerns over how the situation could weigh on banks’ balance sheets and restrict lending in other markets.

The three-month dollar London interbank offered rate was set at 5.22 per cent on Friday.

Copyright The Financial Times Limited 2007

<a href="http://www.bloomberg.com/apps/news?pid=206…&refer=home" target="_blank">http://www.bloomberg.com/apps/news?pid=206…&refer=home</a>

U.S. Treasury Talks With Banks on Commercial Paper (Update3)

By Jesse Westbrook, Kevin Carmichael and Mark Pittman

Oct. 12 (Bloomberg) -- U.S. Treasury officials are talking with Citigroup Inc., JPMorgan Chase & Co. and other banks about a plan to jump-start the asset-backed commercial paper market.

Discussions over the past two weeks addressed structured investment vehicles, units set up by banks to finance purchases of assets including subprime mortgage debt, said a government official and a banker with knowledge of the deliberations. Under one plan being considered by the banks, lenders would establish a fund of as much as $100 billion to buy assets from the SIVs, said two people familiar with the negotiations who declined to be identified because the talks are continuing.

Policy makers are concerned that investors remain reluctant to acquire the paper even if the loans that back them are sound, said the official, who declined to be identified. Setting up a fund would allow SIVs, which own $320 billion of assets, to avoid having to sell their holdings at fire-sale prices and further roil the credit markets.

``If the firms get together to improve the quality, that's a good development,'' said Mark Amberson, who runs the $5 billion Russell Money Fund for the Russell Investment Group in Tacoma, Washington. ``It would be a positive credit event if you wind up with a better vehicle.''

As losses in securities linked to subprime mortgages started to spread in July, investors retreated from high-risk assets. SIVs that issued commercial paper to buy the securities found they could no longer roll over the debt, forcing them to sell about $75 billion of their assets.

Shrinking Market

The amount of asset-backed commercial paper outstanding tumbled to $899 billion in the week ended Oct. 10, from a high of $1.14 trillion at the end of June, according to the Federal Reserve.

Treasury Secretary Henry Paulson, the former Goldman Sachs Group Inc. chief executive officer with 32 years of experience on Wall Street, met with Citigroup CEO Charles Prince, JPMorgan chief Jamie Dimon and other executives from the country's biggest banks during the bi-annual meeting of the Financial Services Forum in Washington on Oct. 10. Lloyd Blankfein, Paulson's successor at Goldman, was also at the meeting according to a person familiar with the session.

``We are always meeting with market participants,'' Treasury spokeswoman Jennifer Zuccarelli said in Washington, declining to confirm any specific discussions.

Treasury Approach

Treasury is playing a ``a facilitators' role,'' said Joseph Mason, an associate professor of business at Drexel University in Philadelphia and a former financial economist at the Office of the Comptroller of the Currency. ``We have a Treasury secretary that is familiar with Wall Street and who they trust.''

The talks are the latest effort by policy makers to help restore liquidity to credit markets, a campaign started by the Fed in August, when it cut the charge on direct loans. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.

``Some markets have been experiencing illiquidity,'' San Francisco Fed President Janet Yellen said in an Oct. 9 speech in Los Angeles, referring to mortgage-backed securities and asset- backed commercial paper. ``This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities.''

As yields on asset-backed commercial paper climbed amid the exodus from the market, some companies found their access to borrowing cut off. Countrywide Financial Corp., the biggest U.S. mortgage lender, had to tap an entire $11.5 billion bank line on Aug. 16 after being unable to fund itself with commercial paper.

Interest Rates

Speculation on ``a bank consortium being formed to address the funding of SIV assets'' helped reduce the interest rates on loans that banks make to each other in dollars in Europe, Jacqueline Cavuoto, a Bear Stearns Cos. analyst in New York, wrote in a note to clients.

The one-month London interbank offered rate, a benchmark for corporate borrowing, has fallen 5 basis points in the past two days, to 5.06 percent. A basis point is 0.01 percentage point. The rate reached 5.82 percent on Sept. 7, up half a percentage point from July, as demand for short-term funds soared.

Fed officials have been monitoring businesses' access to borrowing, where any decline could hurt plans for hiring and spending. Fed Bank of Boston President Eric Rosengren cited the jump in Libor in the past two months as a concern.

Libor Influence

``This tightens credit for a variety of U.S. borrowers, since many loans to businesses and many floating rate mortgages are tied to the Libor rate,'' the Boston Fed chief said Oct. 10 in a speech in Portland, Maine.

Holdings by SIVs have dropped to about $320 billion from about $395 billion of assets in July, Moody's Investors Service said this month.

``SIVs are all losing money right now,'' said Chris Low, chief economist at FTN Financial in New York. ``If any one of the conduits dumps'' their holdings of distressed securities, ``it could trigger selling by the others as well, and that's the scenario they're to avoid,'' he said.

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Kevin Carmichael in Washington at kcarmichael@bloomberg.net ; Mark Pittman in New York at mpittman@bloomberg.net

Last Updated: October 12, 2007 19:46 EDT

<a href="http://calculatedrisk.blogspot.com/2007/10…-liquidity.html" target="_blank">http://calculatedrisk.blogspot.com/2007/10…-liquidity.html</a>

The Citi Bailout: "Master-Liquidity Enhancement Conduit"

Here is more on the Citi SIV bailout plan from the WSJ: Big Banks Push $100 Billion Plan To Avert Crunch

The plan could be announced on Monday:

If the banks agree, the plan could be announced as early as Monday, people familiar with the matter said. Citigroup announces third-quarter earnings Monday. The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC.

Some banks aren't happy with the plan (does this mean Treasury is trying to strong arm other banks into participating?):

The plan is encountering resistance from some big banks. They argue that Citigroup is asking others to help bail out its affiliates and an industry-wide bailout isn't needed.

Some banks are just eyeing the fees:

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.

The timing is interesting since Citi and JPMorgan are expected to sell some $5 billion of loans on Monday to help finance the TXU LBO.

[vincponcet]

<a href="http://www.nytimes.com/2007/10/14/business…amp;oref=slogin" target="_blank">http://www.nytimes.com/2007/10/14/business…amp;oref=slogin</a>

Banks May Pool Billions to Avert Securities Sell-Off

By ERIC DASH

Published: October 14, 2007

Several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as tomorrow, according to people with knowledge of the discussions, but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it is still possible that the parties will not reach an agreement.

“Treasury is very serious about getting some solution in place to take away the fear hanging over the markets,” said Alex Roever, a credit analyst at JPMorgan Chase who has been following the discussions but is not involved in them. “It is a very challenging thing to do. There are so many parties involved and they all don’t agree.

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.

While there are signs that the broader credit markets have begun to stabilize after the Federal Reserve lowered interest rates last month, a pocket of the commercial paper market remains under siege: structured investment vehicles, known as SIVs. The fear is that problems with these vehicles could infect the broader economy.

SIVs, which issue short-term notes to invest in longer-term securities with higher yields, are often organized by banks but are not actually owned or held by them. They are supposed to be financed through the issuance of commercial paper backed by pools of home loans and credit card debt, but the loss of confidence in the quality of subprime mortgage bonds has also tainted these securities.

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.

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.

The proposal being floated calls for the creation of a “Super-SIV,” or a SIV-like fund fully backed by several of the world’s biggest banks to provide emergency financing. The Super-SIV would issue short-term notes to finance the purchase of assets held by the SIVs affiliated with the banks, with the hope of reassuring investors.

But whether the banks would buy the assets directly or just buy the short-term debt is still unclear, according to people briefed on the situation. So are other aspects, like the amount of capital each bank would need to contribute, how it would be administrated, and the fee structures and cost burdens.

The effort to create a backup fund began about three weeks ago, when the Treasury secretary, Henry M. Paulson, called a meeting in Washington that included the chief executives of Citigroup, Bank of America, JPMorgan and other big banks. With Wall Street firms having almost no luck finding buyers for mortgage-backed securities and derivatives, Mr. Paulson wanted to see what could be done to relieve the bottleneck.

Several rounds of discussions followed — in Washington, New York and on conference calls — led by two senior Treasury Department officials: Robert Steel, the under secretary for domestic finance and a former Goldman Sachs executive who is a close adviser Mr. Paulson; and Anthony Ryan, a former investment banker who is now assistant Treasury secretary for financial markets.

Besides hearing from senior executives from each of the big banks, the group also sought ideas from others. Several big international banks, including Barclays and HSBC, have been asked about their interest in participating. The group also reached out to several of the major structured investment funds, as well as big institutional investors in the commercial paper markets.

Edmund L. Andrews contributed reporting.

à noter un effet collatéral, si les SIVs des banques vendent leurs dettes illiquides à ce super SIV, les hedge funds et autre pension funds qui ont des CDOs et autres trucs exotiques dans le genre, devront les "mark-to-market", càd les comptabiliser au prix auquel ils se seront échangés. Ainsi, leur broker, qui sont généralement des filliales des grandes banques et donc qui doivent marker au prix auquel leur maison mère échange, devront leur faire un appel de marge, et ça pourrait en faire couler en série. C'est sur des appels de marge de CDOs que les fonds de bear sterns ont fait faillite en juin.

[Plan Nanar]

C'est sur des appels de marge de CDOs que les fonds de bear sterns ont fait faillite en juin.

Pour les gens qui sauraient point ce que c'est que des CDOs, tu pourrais point faire un petit effort ?

[vincponcet]

Pour les gens qui sauraient point ce que c'est que des CDOs, tu pourrais point faire un petit effort ?

ah oui. Note qu'on en a déjà parlé sur d'autres fils.

Enfin bon, un CDO est : tu prends un paquet de créances, tu découpes en tranches de risques différentes, et tu remets le tout sous forme d'obligations.

généralement, les créances d'origine sont des crédits immobiliers.

http://bigpicture.typepad.com/comments/200…standing-c.html

http://en.wikipedia.org/wiki/Collateralized_debt_obligation

[Timur]

et que la garantie du trésor ou de la fed,

Il n'y a pas de garantie du trésor ou de la fed.

Là, c'est clair, c'est une banque qui demande au trésor d'organiser la socialisation des dettes pourries qu'elles ont consenties.

Au contraire, je pense plutôt que c'est l'Etat qui demande aux banques de s'unir pour qu'il n'ait plus (ou moins) à intervenir.

[A.B.]

Au contraire, je pense plutôt que c'est l'Etat qui demande aux banques de s'unir pour qu'il n'ait plus (ou moins) à intervenir.

Pas l'impression, ca a vraiment l'air d'être a l'initiative de Citi, et je pense que l'État n'y comprend pas grand chose.

[Timur]

Pas l'impression, ca a vraiment l'air d'être a l'initiative de Citi, et je pense que l'État n'y comprend pas grand chose.

Le principe d'un fonds commun soutenu par des banques privées est né, il y a quelques semaines, lors d'une rencontre entre les dix premières banques mondiales organisée par le Trésor américain.

Selon des sources concordantes citées à la fois par le Financial Times et le Wall Street Journal, une garantie publique ne serait pas à l'ordre du jour pour faciliter la mise en place d'une solution émanant du secteur privé, le Trésor américain ne restant qu'une tierce partie dans les discussions. La Banque centrale d'Angleterre avait été très critiquée pour sa gestion de la crise de la banque britannique Northern Rock, en garantissant les dépôts des clients de l'institution.

D'autres banques pourraient rejoindre les trois banques américaines, comme des établissements britanniques, qui, selon le Wall Street Journal, auraient été incités par leurs autorités nationales de régulation des marchés à prendre part au projet.

lemonde.fr

[vincponcet]

Financial Times dit "Citigroup is one leader of the proposal. "

On ne sait pas trop qui a organisé ça. Mon sentiment est que c'est citi qui a demandé l'aide du trésor pour plus ou moins forcer les autres à payer ses bétises.

Aujourd'hui, citi est la plus grosse banque qui a le plus de volume dans ses SIVs qui sont en déroute.

http://ftalphaville.ft.com/blog/2007/10/15…iti-siv-debate/

The great Citi Siv debate

Squeeze, crunch, hangover…call it what you will, earlier reports that the crisis surrounding the credit markets was over appear to have been exaggerated.

Why else construct a bail-out fund, or conduit, variously put at $75bn-$100bn, to hoover up distressed SIV assets?

That’s what Citi, JPMorgan and Bank of America are busy constructing, with the tacit support of the US treasury, according to the Wall St Journal. But while the Journal piece indicated that Britain’s FSA was encouraging big banks on this side of the Atlantic to participate in the plan, Reuters was reporting HSBC’s head of global commercial banking, Sandy Flockhart, speaking in Hong Kong, as saying:

At this point in time, it’s not something that we discussed with the parties.

Krishna Guha and Gillian Tett, writing in the FT, said this “super-conduit” idea was a “a private-sector developed and proposed solution” where the US treasury helped “mediate the conversation,” according to someone with knowledge of the inter-bank discussions.

Citi has created more SIVs than almost any other bank, Guha and Tett note, though its executives insist these vehicles are relatively healthy. And, on the subject of inter-bank rivalries:

A person familiar with the meetings denied that the super-conduit plan was in any way anti-competitive. “Granted there are people who would benefit from watching Citi bleed to death, but everybody agreed at the first meeting this was something positive.”

Bank of America had been “as integral in getting this done as Citigroup” and JPMorgan had been “half-committed” before climbing on board last week.

Meanwhile, Deal Journal, the WSJ’s deal blog, brazenly asks whether this is all just a bailout for Citi.

When does an “improvement in liquidity” represent a “bailout”?..it’s hard not to look at the current details…as a big Treasury-blessed assist for Citigroup…

Even without specifics, it’s clear that Citigroup has the most to gain from this operation. And it’s clearly bad if the balance sheet of the country’s largest bank were frozen for months on end as it poured money into contractual unwindings of SIV positions.

This entry was posted by Paul Murphy on Monday, October 15th, 2007 at 10:21

Pour moi, ça ressemble fort au sauvetage de LTCM en 98.

On ne peut pas dire si l'initiative est privée ou publique, parce qu'à ce niveau-là, vue la socialisation du secteur bancaire, la différence est bien minime.

[A.B.]

Pour préciser les SIV et SPV ce sont pas des helicopteres noirs ou des runes secrète, c'est juste une manière de séparer le risque crédit du produit vis à vis de l'émetteur. C'est plutôt une très bonne chose.

[vincponcet]

Pour préciser les SIV et SPV ce sont pas des helicopteres noirs ou des runes secrète, c'est juste une manière de séparer le risque crédit du produit vis à vis de l'émetteur. C'est plutôt une très bonne chose.

Un SPV ok, c'est fait pour porter de la finance structurée. Très bien.

Mais il n'est pas question de cela, mais de SIV, et là, le but est clairement pour une banque de faire de la gestion d'actifs hors bilan tout en lui assurant des lignes de crédit pour lui donner une garantie vis à vis des investisseurs. Càd que le but d'un SIV est d'échapper aux ratio prudentiels auxquels les banques sont soumises. Dans un modèle socialisé du crédit, c'est logique que l'Etat fixe des quotas et des normes de prises de risque, parce que si un déconne, tout le monde plonge. Avec les SIVs, on peut dire que le "capital requirement" est quasiment inopérant et que la plupart des banques sont en fait des hedge funds hautement leveragés, et en plus, avec la couverture d'une banque centrale.

C'est une sacrée pyramide d'aléa moral qui est construit là.

Au dela de cela, c'est à la limite de la fraude, parce que les lignes de crédit ouvertes aux SIVs sont justement hors bilan, càd que les investisseurs dans la banque sont en général pas au courant des engagements réels de la banque.

<a href="http://blogs.wsj.com/marketbeat/2007/10/15…al-engineering/" target="_blank">http://blogs.wsj.com/marketbeat/2007/10/15…al-engineering/</a>

October 15, 2007, 9:34 am

It’s Not a Bailout. It’s ‘Financial Engineering.’

Posted by David Gaffen

What is this thing?Let’s see if we have this right: funds set up to make money on illiquid securities are causing some problems for large banking institutions, so in response, the banks — including some of those smart enough to avoid such vehicles — are all getting together to make an even larger fund to buy all of this stuff.

As the Wall Street Journal has pointed out in a handful of stories, there are these off-balance sheet structured investment vehicles (SIVs, not SUVs), set up to issue short-term debt and invest the proceeds in things like mortgage-backed securities, which have seized up as investors have run away from the risk thanks to the downturn in the housing market. These SIVs are still struggling to issue paper, the FT.com pointed out last week.

So in response, the banks have created a single master liquidity enhancement conduit, or M-LEC, a sort of golem-like entity that may or may not resemble the Master Control Program from the film “Tron.” The Entity, as it will be known in MarketBeat, will agree (because as an entity, it has no free will) to buy up this debt to help restore these markets.

The Master Control Program, which may be what the M-LEC looks like. (Source: Disney)

The Entity should work swimmingly, unless, of course, investors in the debt markets become more nervous as a result of what is a tacit admission by the banks that things aren’t going so well. At the moment, the 10-year Treasury note is down 6/32, to yield 4.71%, so that reaction has been limited.

“Conceptually, the move makes sense,” writes Simon Nixon of Breakingviews.com, noting that The Entity’s liquidity infusion should “remove a major element of uncertainty from both the commercial paper market and the asset-backed securities market.”

But Mr. Nixon also points out that it raises, again, the moral hazard argument, that a bailout will be forthcoming to those large institutions whose pursuit of risk threatens markets in general. Todd Harrison, CEO of Minyanville.com, responds similarly, saying that “if the private sector will be subjectively saved after reckless risk-taking, have we effectively embraced the notion of moral hazard?”

In particular, he says, the bailout seems to penalize those who “properly managed previous risk” (in part by not using these conduits) or “those who will shape future risk.” Oddly enough, Bank of America and J.P. Morgan Chase are a party to all of this, even though they, unlike Citigroup, have no exposure to this area. (Citigroup has about $80 billion in exposure out of the $400 billion outstanding, which prompts Michael Shedlock to groan: “In other words, Citigroup is setting up a fund to buy assets from itself.” )

Other bloggers have pointed out other inconsistencies, questioning just how pricing is being determined (after all, this is a bank-created entity buying up securities from another bank-created entity), and questioning a New York Times article saying that The Entity will only buy the highest-quality debt held by the SIVs. “The market is objecting to the crappy assets in the SIVs, not the better quality ones,” says Yves Smith on the Naked Capitalism blog.

Needless to say, Mr. Shedlock isn’t a supporter of this plan. “This problem was caused by loose monetary policy in conjunction with rules that allowed garbage to be kept off bank balance sheets”, he writes. “The proposed solution is another scheme to keep garbage off bank balance sheets. Logically the solution and the problem cannot be the same.”