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BANKING

Structured investment vehicles: Why European banks are shunning Mlec

Citi, Bank of America and JPMorgan will fail to persuade several banks to participate in the initial idea of a master-liquidity enhancement conduit.

The US banks – which are the biggest sponsors of the structured investment vehicles that Mlec is designed to help – have reportedly agreed a simplified structure for the conduit. Mlec has the sponsorship of the US Treasury but it does not have the backing of many European institutions which, rightly or wrongly, feel that the plan does not serve the best interests of them or their clients.

HSBC and Standard Chartered are among those who have turned their backs on the scheme; they are pursuing other techniques to solve the liquidity crisis afflicting the asset-backed commercial paper market. And the involvement of other large European sponsors is viewed as unlikely too, so Dresdner Bank and Rabobank are not thought likely participants either. In fact it is US institutions, under pressure from the US Treasury, that will support Mlec.

Although Mlec was mooted as a scheme that could alleviate the much-feared fire sale of decent assets, it was widely criticized on a number of grounds. First, it was deemed expensive. To use the facility – widely touted at $80 billion – investors would have to pay a 100 basis point fee. Also it is seen as detrimental to capital note investors in SIVs as it would only serve senior investors.

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