Superfund... impulsive idea?

By Julian Sudre


When three major US investment banks teamed up to create a superfund of $75bn so as to dampen further catastrophy in the markets, instantly we knew that Armaggeddon will be kept in check -- er, maybe not quite.

As the passengers realised that the ship they were on was scuppered, they compulsively jumped off into cold waters; perhaps the knee-jerk reaction of Bank of America, Citigroup and JP Morgan could do with some restructuring.
The purpose of the fund is to buy assets of ailing so called " Structured Investment Vehicles" in order to prevent a firesale of billion of dollars, thus the prevention of dumping securities or putting them back on to the banks' balance sheets. The problem with SIV is they are unable to sell commercial paper pushing up bonds price and borrowing costs up hence the slowing down of the US and European economy growth.

Recently former Fed Reserves chairman, Alan Greenspan voiced concern about the fund as it may actually hurt jittery financial markets.
In effect, the lower dollar means a reduced trade deficit because the US is exporting more and importing less and more foreign investments are good for the american economy but the flip side of it is that the oil is priced in dollars -- that is, if the dollar keeps falling, the oil will go up.

Not to be oudone, the latest figure to pour scorn on the superfund encouraged by the US Treasury, the renowned investor Warren Buffet, believes those banks should sell 10 per cent of the fund into the open market to ensure it is properly priced.
Paulson, a former CEO of Goldman's Sachs and today US Treasury Secretary, is trying to get european banks into the fund. Deutsche Bank's chief, Josef Ackermann is nonetheless reluctant in joining the fund. Mr Ackermann said it was premature to make a firm judgement about the fund.
Obviously Paulson has been fighting off critics of the master liquidity enhancement conduit or M-LEC but he insists that such fund could accelerate the return of liquidity to parts of the markets; and therefore it should be seen as a complementary to other initiatives. The US Treasury Secretary stresses that the concept for investors working with banks to buy assets that are not credit impaired. Still, it is noteworthy to add that the superfund is a very complex initiative and some investment banks said they did not understand it.

Basically, the superfund is a super conduit or in other words a restructured SIV. Structured Investment Vehicles issue short-term debts to invest in longer-term securities. The fund is designed to hold these assets until investors can better evaluate the difficult rates for the mortgages backing these bonds and other securities. Although, in all fairness, this process could take a year or two to get off the ground.
Today, investors have become sceptical about it as they believe it's primarily another SIV and amounts to a bailout for banks. Would it amount to say that it is a restructuring of previously financed transactions? Well yes, and let us take into account that one bank -- Citi -- has its exposure to SIV's estimated at a stonking $80bn.

The superfund is slated to be launched at the end if the year but its lack of details and the way it will operate seem to be indeed opaque to investors, the reason why one gets to wonder if it is that super a fund.