US SIV Superfund Idea Collapses

The US Treasury’s attempt to create a $75 billion superfund to support liquidity in the market for housing-related securities died a quiet death on Friday. It turns out that few financial institutions were interested in it. Peter Crane, of Crane Data, told Reuters: “It is akin to not having to use your insurance policy – the reasons for the fund have gone away.”

Structured investment vehicles [SIVs] and conduits unable to obtain refinancing from investors were supposed to be able to draw on this fund if need be. SIV assets fell from $340 billion this summer to $265 billion in early December. However, the market managed to move the assets without the fund’s help.

This was a case of politics intervening in the market and doing so rather badly. The US Treasury always insisted that this fund would be a private sector effort. And the private sector took comfort from the fact that the US Treasury helped broker it. It was a promise of government support if not intervention without actually getting the government involved.

The failure of the idea was almost inevitable. Doug Dachille noted in The Wall Street Journal noted last week, “From a practical, and indeed a fear-of-litigation standpoint, many servicers simply won't implement this program, since they have a fiduciary duty to act in the best interests of their investors. They cannot, and should not, be expected to sit still and accept the plan's ‘voluntary’ call for lower payments with no offsetting benefits.”

At the same time, the plan was significant in that the market recovered some of its sense when the plan was announced. This journal has long said that supply and demand drive markets only in textbooks. In reality, they are driven by greed and fear. Fear lost out when the plan was announced, and greed has made it irrelevant.

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