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European SIVs: Beggar thy neighbour

Global problems require global answers.

The organizers of the master liquidity enhancement conduit have come under sustained criticism from a range of market participants. European structured investment vehicles do not believe that it is necessarily in their interests to join the scheme. Citi, Bank of America and JPMorgan – as the big liquidity providers to SIVs – are perceived to be the main beneficiaries of the plan, which aims to forestall the wholesale dumping of SIVs’ credit portfolios on to the market. M-Lec would buy assets held by SIVs and refinance via CP.

Faced with rating agency downgrades and the breaching of liquidity triggers, SIV managers have already been forced sellers this past few months. As a consequence, many SIVs are 60% of their previous size. However, this is only the beginning and there are genuine concerns about the turmoil that further fire sales would cause. Senior SIV note investors, as well as the capital/income investors, would face loss of principal and interest.

The US Treasury-backed plan has garnered support from US banks but sceptics voice concern that this is at the expense of the capital note investors. And it is this that is the main bone of contention because most capital note investors are not based in the US.

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