Citigroup Inc. will take over seven troubled investment funds [Structured Investment Vehicles or SIVs] and assume $58 billion of debt…
The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets…
SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1998 and was the biggest manager of the funds.
The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody’s. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt…
The decision to bring the SIVs onto the balance sheet marks a turnaround for Citigroup. In a Nov. 5 regulatory filing, the company said it “will not take actions that will require the company to consolidate the SIVs.” [New CEO Vikram Pandit reversed course on that one on his second day on the job.]
SIVs from the very start were an overt attempt by Citigroup and other major banks to borrow short and lend long more aggressively than their balance sheets would normally permit. SIVs were therefore deviously structured to be off balance sheet, even though there was always at least an implicit backstop, which just became self-evidently explicit.
If you bought Citigroup stock during the time period in which Citigroup was running SIVs but not accounting for the backstop on its balance sheet, you got royally screwed by a management team that should, in a just world, soon be wearing stripes.
I cannot wait to see what comes out in discovery.
Here’s my other favorite part:
Moody’s Investors Service lowered the bank’s credit ratings.
Go Moody’s! Way to lead the puck!
Wait, could they be any worse?
Moody’s said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.
Yes, they could!
[p.s. Post edited from original to remove reference to Federal banking laws since that wasn’t the key aspect of my point.]