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Citigroup will bail out its seven structured investment vehicles, bringing US$49 billion ($62.5 billion) of assets on to its balance sheet in the biggest move yet by a bank to rescue the failing funds.
Citigroup, the largest manager of SIVs, followed HSBC and WestLB in saving the funds and averting forced asset sales. The New York-based bank said it made the decision after Moody's Investors Service and Standard & Poor's indicated it might cut the credit ratings of the SIVs.
Chief executive Vikram Pandit announced the decision after being named to the post this week. Moody's said this month it was preparing to cut ratings on US$105 billion of SIV debt, including commercial paper and medium-term notes of six managed by Citigroup. The SIVs owned by Citigroup have US$58 billion in senior debt and US$13 billion in cash.
"It's good to see that they're doing the right thing," said California-based analyst Christopher Whalen.
"HSBC set the example."
SIVs, which sell short-term debt to buy longer-term, higher-yielding assets, were shut out of the short-term market as losses on sub-prime mortgage securities prompted investors to retreat from all but the safest of securities. Three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have about US$300 billion of assets.
"After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs," Pandit said.
Citigroup's rescue is independent of the US$80 billion "SuperSIV" orchestrated by Treasury Secretary Henry Paulson that would buy assets from troubled funds.
Concerns that forced sales by SIVs would cause wider disruptions led Paulson to broker an agreement on October 15 with Bank of America, Citigroup and JPMorgan Chase & Co, the biggest US banks, to form the fund. Paulson said he planned to have the so-called master liquidity enhancement conduit running by year-end.
The banks began marketing the SIV to smaller institutions last week, sources say. New York- based BlackRock is managing the fund.
SIV managers aren't waiting for the "SuperSIV" to be set up. London-based HSBC, the second-largest SIV manager after Citigroup, is organising its own bailout by absorbing the US$45 billion of assets in its Cullinan Finance and Asscher Finance. Capital note investors will be offered the chance to exchange their debt for notes issued by new companies, bearing the risk of losses from those companies.
WestLB, based in Dusseldorf, agreed last week to provide financing for its SIVs so they can repay their US$13.3 billion of senior debt.
- Bloomberg
How a boy too shy to talk rose to the top
The first call came about 1am. Vikram Pandit, the newly appointed head of Citigroup, the world's largest bank, had told his wife, and she promptly contacted his father in Mumbai.
Then the phone would not stop ringing as the extended Pandit family began celebrating the rise of the man who, as a child in India, was too shy to talk to anyone from outside of his immediate family.
"Do not write too much," Pandit's father, Shankar, told a reporter from and Indian newspaper. "Just tell them that he's a good boy," Pandit, who joined Citigroup only this year, beat a series of other contenders who reportedly included Shaukat Aziz, formerly the bank's global private banking business head and who until last month was serving as Prime Minister of Pakistan.
Pandit was formerly Morgan Stanley's head of investment banking and capital markets, one of the top jobs on Wall Street. But the executive has never run a public company and there was some feeling among investors that he may not be the ideal candidate. Pandit Snr said he had discussed the issue with his son before the announcement, and asked him what he thought of his chances.
He apparently told his 85-year-old father: "I know it's me. The board is only taking time to make the right decision."
Since his appointment on Tuesday, Pandit has not been out of the headlines.
He has already announced he may cut costs and sell assets in a move to protect the group's capital in the face of growing mortgage losses.
- Independent
