With all of the problems that we have experienced thus far in structured credit, one might think that there would be more people scratching their heads about why there are so many off-balance-sheet entities in the financial community in the first place.
Of course, the fact that conduits, and special-purpose entities generically, reside off balance sheets is a reason why everyone has been caught by surprise. Because if mountains of this paper are away from plain sight, potential problems can't be anticipated, as you can't attempt to understand what you can't see.
In any case, with the spotlight now trained on the
structured-credit arena, institutional investors have become choosier about what paper they're willing to own, thus creating the illiquid environment that the short-term money-market funds and the banks currently find themselves in.
For the banks, this comes at an inconvenient time because they're trying to figure out how to deal with the $300 billion-plus of leveraged buyouts they've committed to finance. Conduits tend to roll at the same time. And last week was one of those occasions when a considerable amount -- more than $100 billion -- of asset-backed commercial paper needed to be rolled, meaning that the debt required refinancing.
Meanwhile, though London appears to be the epicenter of conduit angst these days, our homegrown
Citigroup (
C,
news,
msgs) appears to have plenty of exposure. That's according to a friend who in an e-mail to me rattled off the following list of its structured investment vehicles, or SIVs: Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Vetra Finance and Zela Finance. He was able to obtain a portfolio commentary for Beta Finance, in whose summary I found three interesting items.
Citigroup notes that the leverage in this particular vehicle, Beta Finance, is "only 14.24 times." Thus, Citigroup, a leveraged entity, owns a gaggle of leveraged S&Ls. That helps illustrate a point I've made many times: that the well of liquidity that bulls were citing two months ago as a reason to be bullish was just a wall of leverage. (It's worth noting that the net asset value of Beta Finance has declined 19% from its high and that Citigroup's other conduits are apparently down a similar amount.)
It just boggles the mind how much leverage is employed by financial institutions and how little knowledge the world has of their workings.
As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.
Which makes one wonder: Since these entities are designed specifically to circumvent the rules, why have they been countenanced by the rule makers?
