Master Liquidity Enhancement Conduit
Encyclopedia
The Master Liquidity Enhancement Conduit (MLEC), also known as the Super SIV (structured investment vehicle
), was a plan announced by three major banks based in the United States on October 15, 2007, to help alleviate the subprime mortgage financial crisis. Citigroup
, JPMorgan Chase, and Bank of America
created the plan in an effort to stave off financial damage. Due to a tightening of the credit markets linked to the crisis, a number of structured investment vehicles (SIVs), backed by major banking institutions, found themselves less able to obtain short-term financing on the open market
, which they need in order to ensure their continued operations, due to investors concerns about the SIVs exposure to subprime mortgages. Complicating the problem was the fact that some of the investment securities held by SIVs are valued by a computer model developed by the securities traders and investment banks. The mark to model
process is used by all financial instiutions where a deep and liquid market does not exist. Many of the securities' valuations can be found in the company's financial report as illiquid and hard to value level 3 assets.
The credit crunch, along with pricing difficulties resulting from the mark to model process, caused fears that the SIVs might be forced to sell off their assets at "fire sale
" prices, far below their stated value. The resulting flood of bargain priced asset-backed securities
(ABS) could further destabilize the credit markets and perhaps force the parent institutions to place the SIVs on their balance sheets, indirectly reducing the amount of money the banks could then loan.
The Master Liquidity Enhancement Conduit was intended to facilitate the short term refinancing these SIVs require, thus avoiding the risk of a self-reinforcing downward spiral in the ABS markets.
Some considered this a privately funded way to bail out large financial institutions that made bad bets in the housing market. Part of this criticism resulted from Citigroup's involvement, as Citi has the largest exposure in SIVs, and there was some concern that MLEC would only delay problems, not lead to solutions.
The United States Department of the Treasury
played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel
taking the initiative in bringing the banks together for the plan. Others questioned the legality of fund participants' ability to work in concert, supporting price discovery in certain illiquid positions held by the SIVs, in light of United States antitrust law.
On October 19, 2007, Wachovia
and Fidelity
joined in the creation of the MLEC.
The value of the fund was projected to reach as much as $400 billion worth of investment securities.
On 21 December 2007, cnn.com reported that the Super SIV fund plan was being abandoned, and that the banks had stated the plan was "not needed at this time". A number of private banks pledged to support individual SIVs. In February 2008, Standard Chartered, soon after promising support for the Whistlejacket SIV, abandoned the fund. Orange County, California
has $80 million invested in Whistlejacket.
Structured investment vehicle
A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...
), was a plan announced by three major banks based in the United States on October 15, 2007, to help alleviate the subprime mortgage financial crisis. Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, JPMorgan Chase, and Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
created the plan in an effort to stave off financial damage. Due to a tightening of the credit markets linked to the crisis, a number of structured investment vehicles (SIVs), backed by major banking institutions, found themselves less able to obtain short-term financing on the open market
Open market
The term open market is used generally to refer to a situation close to free trade and in a more specific technical sense to interbank trade in securities.-Use of the term in economic theory:...
, which they need in order to ensure their continued operations, due to investors concerns about the SIVs exposure to subprime mortgages. Complicating the problem was the fact that some of the investment securities held by SIVs are valued by a computer model developed by the securities traders and investment banks. The mark to model
Mark to model
Mark-to-Model refers to the practice of pricing a position or portfolio at prices determined by financial models, in contrast to allowing the market to determine the price. Often the use of models is necessary where a market for the financial product is not available, such as withcomplex financial...
process is used by all financial instiutions where a deep and liquid market does not exist. Many of the securities' valuations can be found in the company's financial report as illiquid and hard to value level 3 assets.
The credit crunch, along with pricing difficulties resulting from the mark to model process, caused fears that the SIVs might be forced to sell off their assets at "fire sale
Fire sale
A fire sale is the sale of goods at extremely discounted prices, typically when the seller faces bankruptcy or other impending distress. The term may originally have been based on the sale of goods at a heavy discount due to fire damage...
" prices, far below their stated value. The resulting flood of bargain priced asset-backed securities
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
(ABS) could further destabilize the credit markets and perhaps force the parent institutions to place the SIVs on their balance sheets, indirectly reducing the amount of money the banks could then loan.
The Master Liquidity Enhancement Conduit was intended to facilitate the short term refinancing these SIVs require, thus avoiding the risk of a self-reinforcing downward spiral in the ABS markets.
Some considered this a privately funded way to bail out large financial institutions that made bad bets in the housing market. Part of this criticism resulted from Citigroup's involvement, as Citi has the largest exposure in SIVs, and there was some concern that MLEC would only delay problems, not lead to solutions.
The United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel
Robert K. Steel
Robert King "Bob" Steel is an American business leader and an expert on financial institutions and markets. In June 2010, he was named Deputy Mayor for Economic Development by New York City Mayor Michael Bloomberg...
taking the initiative in bringing the banks together for the plan. Others questioned the legality of fund participants' ability to work in concert, supporting price discovery in certain illiquid positions held by the SIVs, in light of United States antitrust law.
On October 19, 2007, Wachovia
Wachovia
Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo in 2008, Wachovia was the fourth-largest bank holding company in the United States based on total assets...
and Fidelity
Fidelity Investments
FMR LLC or Fidelity Investments is an American multinational financial services corporation one of the largest mutual fund and financial services groups in the world. It was founded in 1946 and serves North American investors. Fidelity Ventures is its venture capital arm...
joined in the creation of the MLEC.
The value of the fund was projected to reach as much as $400 billion worth of investment securities.
On 21 December 2007, cnn.com reported that the Super SIV fund plan was being abandoned, and that the banks had stated the plan was "not needed at this time". A number of private banks pledged to support individual SIVs. In February 2008, Standard Chartered, soon after promising support for the Whistlejacket SIV, abandoned the fund. Orange County, California
Orange County, California
Orange County is a county in the U.S. state of California. Its county seat is Santa Ana. As of the 2010 census, its population was 3,010,232, up from 2,846,293 at the 2000 census, making it the third most populous county in California, behind Los Angeles County and San Diego County...
has $80 million invested in Whistlejacket.
External links
- SIV-Plan Founders to Seek More Support for Superfund
- Greenspan Warns Of Risks With ‘Super SIV’ Fund http://blogs.wsj.com/economics/2007/10/19/greenspan-warns-of-risks-with-super-siv-fund/