Master Liquidity Enhancement Conduit
The Master Liquidity Enhancement Conduit (MLEC), also known as the Super SIV (structured investment vehicle), was a plan announced by three major banks based in the United States on October 15, 2007, to help alleviate the subprime mortgage financial crisis. Citigroup, JPMorgan Chase, and Bank of America created the plan in an effort to stave off financial damage. Due to a tightening of the credit markets linked to the crisis, a number of structured investment vehicles (SIVs), backed by major banking institutions, found themselves less able to obtain short-term financing on the open market, which they need in order to ensure their continued operations, due to investors concerns about the SIVs exposure to subprime mortgages. Complicating the problem was the fact that some of the investment securities held by SIVs are valued by a computer model developed by the securities traders and investment banks. The mark to model process is used by all financial institutions where a deep and liquid market does not exist. Many of the securities' valuations can be found in the company's financial report as illiquid and hard to value level 3 assets.
The credit crunch, along with pricing difficulties resulting from the mark to model process, caused fears that the SIVs might be forced to sell off their assets at "fire sale" prices, far below their stated value. The resulting flood of bargain priced asset-backed securities (ABS) could further destabilize the credit markets and perhaps force the parent institutions to place the SIVs on their balance sheets, indirectly reducing the amount of money the banks could then loan.
The Master Liquidity Enhancement Conduit was intended to facilitate the short term refinancing these SIVs require, thus avoiding the risk of a self-reinforcing downward spiral in the ABS markets.
Some considered this a privately funded way to bail out large financial institutions that made bad bets in the housing market. Part of this criticism resulted from Citigroup's involvement, as Citi has the largest exposure in SIVs, and there was some concern that MLEC would only delay problems, not lead to solutions.
The United States Department of the Treasury played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel taking the initiative in bringing the banks together for the plan. Others questioned the legality of fund participants' ability to work in concert, supporting price discovery in certain illiquid positions held by the SIVs, in light of United States antitrust law.
The value of the fund was projected to reach as much as $400 billion worth of investment securities.
On 21 December 2007, cnn.com reported that the Super SIV fund plan was being abandoned, and that the banks had stated the plan was "not needed at this time". A number of private banks pledged to support individual SIVs. In February 2008, Standard Chartered, soon after promising support for the Whistlejacket SIV, abandoned the fund. Orange County, California has $80 million invested in Whistlejacket.
- Gillian Tett, Krishna Guha, David Wighton (2007-10-14). "Banks agree $75bn mortgage debt fund". Financial Times. Retrieved 2007-10-21.
- Mark to Model
- Kathleen Pender (2007-10-16). "Bank bailout plan doesn't solve underlying problem". San Francisco Chronicle. Retrieved 2007-10-21.
- Mark Pittman (2007-10-15). "Citigroup, Bank of America Plan $80 Billion SIV Fund". Bloomberg. Retrieved 2007-10-21.
- Stracia (2007-11-08). "Cartel Blanche". Stracia. Retrieved 2007-11-25.
- Glenn Somerville (2007-10-20). "Paulson says banks credit rescue fund market-driven". Reuters. Retrieved 2007-10-21.
- Banks to abandon 'Super-SIV' fund, CNN.com, 21 December 2007