By Shannon D. Harrington and Elizabeth Hester
Dec. 13 (Bloomberg) -- Citigroup Inc. will bail out its seven structured investment vehicles, bringing $49 billion of assets onto its balance sheet in the biggest move yet by a bank to rescue the failing funds.
Citigroup, the largest manager of SIVs, followed HSBC Holdings Plc and WestLB AG in saving the funds and averting forced asset sales. The New York-based bank said it made the decision after Moody's Investors Service and Standard & Poor's indicated they may cut the credit ratings of the SIVs.
Chief Executive Officer Vikram Pandit announced the decision after being named to the post Dec. 11. Moody's said Dec. 3 that it is preparing to cut ratings on $105 billion of SIV debt, including commercial paper and medium term notes of six managed by Citigroup. The SIVs owned by Citigroup have $58 billion in senior debt and $13 billion in cash.
``It's good to see that they're doing the right thing,'' said Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics, a research firm. ``HSBC set the example.''
SIVs, which sell short-term debt to buy longer-term, higher- yielding assets, were shut out of the short-term market as losses on subprime mortgage securities prompted investors to retreat from all but the safest of securities. Three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have about $300 billion of assets.
``After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs,'' Pandit said in an e-mailed statement.
Citigroup's rescue is independent from the $80 billion ``SuperSIV'' orchestrated by Treasury Secretary Henry Paulson that would buy assets from troubled funds.
Concerns that forced sales by SIVs would cause wider disruptions led Paulson to broker an agreement on Oct. 15 with Bank of America, Citigroup and JPMorgan Chase & Co., the biggest U.S. banks, to form the fund. Paulson said he plans to have the so-called master liquidity enhancement conduit, or M-LEC, running by year-end.
The banks began marketing the SIV to smaller institutions last week, two people with knowledge of the plan said. New York- based BlackRock Inc. is managing the fund.
SIV managers aren't waiting for the ``SuperSIV'' to be set up. London-based HSBC, the second-largest SIV manager after Citigroup, is organizing its own bailout by absorbing the $45 billion of assets in its Cullinan Finance Corp. and Asscher Finance Corp. Capital note investors will be offered the chance to exchange their debt for notes issued by new companies, bearing the risk of losses from those companies rather than the SIVs.
WestLB AG, based in Dusseldorf, agreed last week to provide financing for its SIVs, called Harrier Finance Funding Ltd. and Kestrel Funding Plc, so they can repay their $13.3 billion of senior debt. HSH Nordbank AG in Hamburg restructured the $4.8 billion Carrera Capital Finance Ltd., eliminating the need to sell assets.
JPMorgan Chase & Co. spokeswoman Kristin Lemkau declined to comment. A call to Bank of America spokesman Scott Silvestri wasn't immediately returned after business hours. A call and e- mail to BlackRock spokesman Brian Beades weren't immediately returned after hours.
Treasury spokeswoman Brookly McLaughlin didn't immediately return calls and an e-mail seeking comment.
Bringing the assets on the balance sheet may be better than creating potential losses for creditors to its SIVs, said Don van Deventer, chief executive officer at Kamakura Corp., a Honolulu- based provider of software and research to financial companies that has done work for owners of SIV liabilities.
``In the end I think the calculation is the reputational damage would cost more than the incremental cash to bail it out,'' van Deventer said. ``They've got a lot on the line. What we've just learned is SIVs are not an off-balance sheet vehicle we thought they were. The reality is the SIVS are off-balance sheet when times were good and on balance sheet when times are bad.''
The assets have declined to $62 billion, including $13 billion of cash, from $87 billion in August.
Of the SIV assets, 54 percent are AAA rated and 43 percent rate rated AA by Moody's, Citigroup said. The SIVs have no direct holdings of subprime-mortgage assets and indirect exposure to $51 million, Citigroup said.
Citigroup still anticipates returning to its targeted capital ratios by the second quarter of 2008, according to the statement. The terms of the transaction will be complete in early 2008.
``In the end that's the only solution that's guaranteed to work in a short period of time,'' said Don van Deventer, chief executive officer at Kamakura Corp., a Honolulu-based provider of software and research to financial companies that has done work for owners of SIV liabilities. ``Everybody else has gone that route.''