Saturday, October 20, 2007

Paulson Defends the SIV Bail-Out Fund

Paulson defends the SIV bail-out fund being put together by a number of large banks from comments made by Greenspan. Text in bold is my emphasis. From Reuters:

U.S. Treasury Secretary Henry Paulson said on Friday a multi-billion-dollar credit rescue fund that big banks were setting up was purely market-driven and was not intended to help banks dispose of bad assets.

Paulson spoke to a few reporters after a news conference and was asked about criticism by former Federal Reserve Chairman Alan Greenspan, who said the fund might have "dire consequences" by delaying a necessary depreciation of the assets. Why is Greenspan making comments, I thought he was retired.

"This is market-driven and market-based," Paulson said. "The purpose of not to buy bad assets or assets that have credit problems (but) for end-investors, working with the banks, to buy assets that aren't credit-impaired."

"That will accelerate the return to liquidity in parts of this market," Paulson said.

The investment pool is intended to acquire mortgage assets held by so-called Structured Investment Funds. Essentially , it is a bank-led "super fund" called Master Liquidity Enhancement Conduit, and it will resell the assets to investors.

In a published interview on Friday, Greenspan said the fund would increase the liquidity of those who had SIVs and effectively prop up the prices of distressed securities rather than allow them to fall as they should until bargain-hunters appear to buy them.

Paulson was evidently angered by Greenspan's criticism. He said Treasury's role in helping get it organized was only to facilitate it and emphasized that Treasury had been in frequent touch with the Federal Reserve and market participants in the process of doing so.

The fund will issue short-term notes to investors and use the proceeds to buy securities from SIVs that are going out of business. In that way, the assets can be resold but they are less likely to be sold at bargain-basement prices.

There are about 30 SIVs that have total assets valued at around $400 billion.

Paulson said that "under the best of circumstances it will take a good while for this master fund to be put together, documented...and to work." But he emphasized it is intended to function under market principles.

"All of us want the same thing, which is we want market forces to work and for it to be market-driven and to have market participants work together to accelerate a return to the liquidity that under the best of cases is going to be slow," Paulson said.

He said it will be "more valuable" if it is operating relatively soon and said he hoped it will be functioning before the year is over.

"Based upon my experience in doing complicated structures with multiple firms involved, it'll take a while but I think it should be do-able by the end of the year," Paulson said.

Greenspan suggested it would be best to let SIVs and banks bear the burden of holding bad assets by making them lower prices as much as necessary to sell them, rather than setting up a fund that some see as a bailout for the banks.

"If you intervene in the system, the vultures stay away," Greenspan commented. "The vultures sometimes are very useful."

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