US banks want you to carry the can for their sub-prime mistakes

A rescue plan proposed by a group of large banks and backed by Treasury Secretary Paulson (who presided over Goldman Sachs massive foray in to sub-prime CDOs etc) recommends a massive rescue fund the Master Liquidity Enhancement Conduit (mmmm!) which would borrow from the public and invest the proceeds in mortgage-backed securities. So, banks (which issued CDOs) and hedge funds (hiding losses in structured investment vehicles) all knowing that the book value of these assets is well above what will be realised wants you to lend money to their fund which will buy the dud assets. In other words they want to get the bad assets off their balance sheets on to yours (the investor) before the losses are realised. And when they are … well, so sorry, unsecured, you loose.

The scheme may delay the inevitable, it would certainly remove some of the pain from the fiduciaries who put the sub-prime CDOs together or invested your money in them, and it would be more difficult for a host of individual investors to get bailed out later when the reality strikes. Yet again the banks and asset managers will dance with smoke and mirrors to delude us in to a “great” story. Caveat emptor.

(John Mauldin offers a more optimistic take on the super fund in The $100 Billion Superfund to the Rescue? and if a fund were to work as he describes it might help. Even so, it does seem that the market needs clarity and trust, not another layer of contracts. And The Economist shares its initial scepticism in Curing SIV: A bailout fund raises more questions than answers.)

The US housing market is already starting to clear - that's efficiency
How the sub-prime melts ...

Leave a Reply