Risk-pooling, or more poor transparency in banking (question mark)

I honestly do not have a firm view on this story:

Several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles.

Although I have come across it a few times today.

While there are signs that the broader credit markets have begun to stabilize after the Federal Reserve lowered interest rates last month, a pocket of the commercial paper market remains under siege: structured investment vehicles, known as SIVs. The fear is that problems with these vehicles could infect the broader economy.

SIVs, which issue short-term notes to invest in longer-term securities with higher yields, are often organized by banks but are not actually owned or held by them. They are supposed to be financed through the issuance of commercial paper backed by pools of home loans and credit card debt, but the loss of confidence in the quality of subprime mortgage bonds has also tainted these securities.

Analysts say that investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once. That would put intense pressure on prices. Wall Street firms and hedge funds face potentially huge hits to their profits.

…

The proposal being floated calls for the creation of a “Super-SIV,” or a SIV-like fund fully backed by several of the world’s biggest banks to provide emergency financing. The Super-SIV would issue short-term notes to finance the purchase of assets held by the SIVs affiliated with the banks, with the hope of reassuring investors.

But whether the banks would buy the assets directly or just buy the short-term debt is still unclear, according to people briefed on the situation. So are other aspects, like the amount of capital each bank would need to contribute, how it would be administrated, and the fee structures and cost burdens.

The effort to create a backup fund began about three weeks ago, when the Treasury secretary, Henry Paulson Jr., called a meeting in Washington that included the chief executives of Citigroup, Bank of America, JPMorgan and other big banks.

With Wall Street firms having almost no luck finding buyers for mortgage-backed securities and derivatives, Paulson wanted to see what could be done to relieve the bottleneck.

My first problem is what looks, to me, like a logical inconstistency. If there was this great credit/liquidity problem, requiring loads of public money to be put at risk, where is this USD75-100bn coming from? If it’s coming from the banks, was there that great a problem in the first place? If banks are ultimately going to approach the Fed for loans to purchase debt from their own investment arms, is that not more public money being used to purchase debt instruments that no private profiteers will touch? If so, just who in hell have we put in charge of our money, anyway? (oh, right).

This is, of course, the same Paulson who routinely refers to the miraculous strength of the US economy. The same economy that relies on bullshit measures of inflation to look like it’s moving forward at all, and even then only if you don’t compare it to any other country (U-S-A! 79th-of-83-Stock-Exchanges! doesn’t have quite the same ring to it…). Honestly, what are these people carpeting their offices with, anyway?

Back to the banks, then: are they buying the assets in question, or the debt? If the former, do those assets get properly audited, with the correct values placed on their balance sheets? Or, is this just a scam for banks to protect one another and, such as way back when Bear Stearns first coughed up its own lungs, manage to prevent the market from ever getting a chance to point out that all these assets are worth exactly the paper on which they’re printed?

Ultimately I don’t have a problem with banks pooling risks – i.e. moving back towards the sort of no-nonsense re-insurance they left behind with common sense several years ago. I object to public money being used (or, worse, created!) to deal with this nonsense.