What the Citibank, et al $80B Bail-Out Fund is Trying to Avoid
Below is an example of what the Citibank, B of A, and J P Morgan bail-out fund are trying to circumvent the default of a SIV. From Bloomberg:
Royal Bank of Scotland Group Plc is in talks to buy the assets of Cheyne Finance Plc, the structured investment vehicle that defaulted last week.
``The action follows detailed discussions with a number of different bidders over the past few weeks and after consultation with the informal creditors' committees,'' Cheyne Finance and its receiver Deloitte & Touche LLP said today in a statement.
Cheyne Finance appointed Deloitte last month to oversee its assets after the SIV was forced to liquidate some holdings to repay maturing commercial paper. The company, which bought securities backed by home loans, had its credit ratings cut to default by Standard & Poor's last week.
SIVs have sold about $75 billion of assets since July after record U.S. home foreclosures prompted investors to avoid debt linked to mortgages. The U.S. Treasury stepped in to arrange talks between Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. to create an $80 billion fund to buy the assets.
Cheyne Finance, set up by London-based hedge fund Cheyne Capital Management Ltd., has about $7.3 billion of outstanding debt, Standard & Poor's said on Oct. 19. The value of the portfolio backing Cheyne Finance's bonds is $6.2 billion, excluding cash of $948 million, S&P said.
More than half of Cheyne Finance's holdings are mortgage- backed securities, and have a market value of 93 percent of their face value, S&P said.
Deloitte is trying to organize a restructuring of the SIV's debt or the sale of its assets.
SIVs, with $320 billion of assets, invest in securities from mortgage-backed debt to bank bonds. They finance their investments by selling commercial paper, debt that comes due in 270 days or less, and medium term notes, which mature in nine months or longer.