HSBC Provides $35 billion in SIV Funding

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We talked about it before with Yves Smith of Naked Capitalism – banks putting structured investment vehicles (SIVs) back on their balance sheets as funding in commercial paper markets dried up – and now HSBC has made it a reality. HSBC announced today that it will put two SIVs back on its balance sheet and provide up to $35 billion in funding to keep the SIVs from being forcefully liquidated reports Market Watch:

HSBC said it’s moving Cullinan Finance and Asscher Finance, the two SIVs, onto its balance sheet to prevent a forced liquidation of what it called “high-quality assets.” If HSBC did not make the move, the vehicles were at risk of triggering market value or net asset value restrictions that would’ve prompted sales of the debt portfolios.

As the article notes this is in direct opposition to the super-fund currently being conjured by other large banking players and may trigger other banks to do the same thing.

HSBC’s plan appears to be at odds with the superfund being created by Citigroup and Bank of America to buy SIV assets.

And it comes as Citigroup is under pressure in some quarters to move $41 billion in off-balance sheet securities onto its balance sheet, according to a report in The Wall Street Journal on Monday.

Those who say Citi needs to put these securities, known as collateralized debt obligations, onto its balance sheet argue that because Citi acted over the summer to backstop some of them, its relationship with them changed, prompting a reconsideration event, the report said. Citi says its accounting practices are in line with applicable rules and regulations.

Of course this move comes as liquidity continues to dry up in commercial and other debt markets forcing the European Central Bank to inject euros by the truck load to keep a freeze up of the banking system from occurring. Will this be the answer to restoring confidence to the SIV (and other debt) markets? HSBC thinks so:

“We believe that HSBC’s actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher, the two SIVs managed by HSBC,” the bank said in a statement.

Personally, I believe this is a step in the right direction. By getting these SIVs back on balance sheets the banks become accountable for them as entities and provide transparency to their value and holdings by becoming part of SEC reporting. There is another step needed however; and that is the accurate valuation of the holdings in these SIVs. Unfortunately, the banks are moving these assets on to their balance sheets for the precise reason of “controlling” the value by avoiding a mark to market scenario where prices are greatly depressed by the lack of current demand.

In other words, don’t hold your breath to see that second step happen any time soon.