With the debate rumbling on about whether conduits and SIVs have Enron-esque characteristics, or whether they are simply the innocent victims of credit contagion, the problems hit Sydney on Wednesday.
National Australia Bank has had to take A$6bn of conduit-related loans onto its balance sheet after problems in the ABCP market cut off the usual supply of financing. According to Dow Jones, NAB’s chief financial officer Michael Ullmer will tell a UBS investment conference in London that the bank expects to see about A$11bn of these assets migrate to its balance sheet by the end of September.
And, quoting directly from the Cheery PR Guide to Complex Financial Crises, a spokesman told the newswire:
So whilst this wasn’t a predicted event, it isn’t an event that causes us any concern.
All the assets are rated AA- or higher and the impact on NAB’s core capital ratios will be minimal, the spokesman added.
We aren’t concerned about the credit quality of the assets coming on board because they are subject to our normal credit processes and of course we have done a lot of work to diversify our funding over the years so we are in a strong funding position.
Good pennies, in other words, rather than bad pennies rolling back. Honest.
For what it’s worth, the Wall St Journal has now woken up to the unpredictable aspects of conduits and SIVs. As the paper explained on Wednesday:
Though few investors realise it, banks such as Citigroup could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper.
Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission.
Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.
