I miss Slim Pickens and Peter Sellers!
There has been a lot of rhetoric being tossed around in the news outlets and in the blogosphere about M-LEC.
Some have called it a "Ponzi Scheme." Others have made similar statements.
SIVs are complex entities. Many on Wall Street have just become familiar with them over the last two months.
The plan is also, necessarily, complicated. Furthermore, there is only an agreement in principal, so the details are sketchy at best.
That said, there are clearly suspicions that have been raised.
After Enron, Worldcom, etc. it is easy to understand the source of these suspicions.
Furthermore, this is tied - however tangentially - to the mortgage mess that we will be cleaning up for the foreseeable future.
All that said, M-LEC is meant for a very specific purpose; and it isn't to resolve all the excesses of the last few years.
Mark Palermo has posted some reasonable questions relating to M-LEC on his blog. Others have similar questions.
I have posted my comments from his blog below:
As per your request: This is not the plan!Sphere: Related Content
You have the outline somewhat correct, but you're getting tied up in the
hyperbole being spread in the blogosphere (I will not attempt to describe the motives of those spreading it) and, surprisingly, in some of the news outlets.
There is a lot that we don't know.
What we do know is that SIVs have been around for nearly 20 years (the first one was established by Citi in 1988). They have functioned, under the radar, without any real problems until now.
Another thing we know is that these off-balance sheet vehicles are off-balance sheet for a reason - they are not owned by the banks. The banks have, as far as we've been told, no obligation to support the SIVs other than agreements that have been written to provide short-term back-stop funding.
The banks are under no legal obligations to take SIV assets on their balance sheets, even if they sponsored them.
The risk the banks face, if they don't deal with this problem, is reputational (both tangible in the form of angry customers, and intangible in terms of future business).
A continuing theme of those who denigrate the idea of M-LEC is that the underlying assets of the SIVs are "bad" and that this is a way to avoid taking a hit.
We DON'T know what assets are in the SIVs. The publicly available information indicates, however, that the holdings are primarily in structured securities.
It just so happens now that structured securities have fallen into disfavor (and that's an understatement). SIVs issue structured commercial paper that is backed by structured securities.
In other words, the opacity of both the SIVs and their underlying assets is reducing demand for these securities.
One thing that needs to be remembered is that there is often a difference between Price and Value.
Since there are no reasonable bids for the underlying assets, forced sales of the SIV's assets could, in the current environment, only be transacted at severely distressed levels. Prices will almost certainly be below, and perhaps significantly below, the values of the assets.
Furthermore, given that many other owners of the same securities must mark their assets to market, there could be a fire sale of assets - regardless of their quality. THAT would be a significant threat to the financial markets.
The idea of M-LEC is to act as a bridge so that the assets can be sold in an orderly fashion (with gains and losses being recognized by the appropriate parties at that point).
The Treasury and the banks are hoping that an entity that will have the explicit backing of the banks (regardless of the value of the underlying securities) will comfort investors enough so that they will continue to purchase the asset-backed
commercial paper of the SIVs (and M-LEC).
I have been discussing this subject at some length on my blog, and you can find links there
for some reports and other material that may give you greater comfort (one posting with a number of supporting documents is here).
This is a complex topic. We're effectively dealing with derivatives of derivatives.
I intend to discuss some of the broader issues in the near future on my blog.