collapse of confidence in Merrill Lynch & Co. after the world’s
biggest brokerage lost six times more than it forecast earlier this
month helps explain why Treasury Secretary Henry Paulson’s attempt to
rescue SIVs is troubled.
Paulson’s plan, announced last week, may do little to address the lack
of transparency that has roiled global fixed- income markets since July
31, when two hedge funds managed by Bear Stearns Cos. went bankrupt
following losses on securities tied to subprime mortgages. Investors
aren’t willing to rely on estimates by Wall Street traders to value
these bonds and there’s no central trading system or exchange. Fitch
Ratings says the value of SIVs, which own more than $320 billion of
bonds, fell to 73 percent as of Sept. 28 from 100 percent in July.
“Continuing to mask transparency by means of rearranging risk
without actually offloading or recognizing the true value of that risk
is not going to help anyone,” said Joseph Mason, an associate
professor of business at Drexel University in Philadelphia and a former
financial economist at the Office of the Comptroller of the Currency.
There are supposedly around $400 billion SIVs swimming about the
planet, most of which are drowning. $400 billion, to put things in
perspective, is what we spent on killing Iraqis and stealing oil in
Iraq for about 3 years. I remember when Bush fired the Treasury
Secretary when he warned this war would cost us $200 billion. This sum
is big, by the way. Just as the Iraq war is bankrupting the US
government, so will this global SIV fund mess. As each one sinks
beneath the waves, the others take on more water.
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