Thursday, 23 August 2007

It's all about funding baby

From the FT:
Standard & Poor’s issued a string of downgrades and negative watch notices on a number of SIV-lite programmes late on Tuesday night.

SIV-lites, a type of collateralised debt obligation that rely on short-term commercial paper to fund senior debt, have come under intense pressure due to falling values in their investments combined with a liquidity crunch in commercial paper markets.

“A vast majority of the portfolio of each of these market-value structures is invested in US mortgage securities,” S&P said.
A few things are becoming clearer. Firstly isn't it amazing the number of structures that have MBS in them? I guess you can think of CDO of CLO paper as a Libor floater, but putting in a money market fund is just bizarre. Putting some in a SIV makes more sense, but weren't SIVs meant to be diversified? Having a vast majority of your funds in anything is not diversification.

Secondly it's fascinating that the price of liquidity is such a dominant factor at the moment. No one much cares if these structures are ultimately money good. What is hurting is how much it is costing to keep them afloat in the current liquidity market. This makes ABCP look like a much worse idea now that it did a couple of months ago.

Finally this is so predictable it is deeply amusing:
Meanwhile, Moody’s said a constant proportion debt obligation run by UBS had been hurt by falls in net asset values and put it on review for possible downgrade.
I'd be interested to know how ABN's CPDO structures are doing...

Update. According to Bloomberg, CPDOs Rated AAA May Risk Default, CreditSights Says. In the immortal words of my friend Sue, no shit Sherlock.

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