Citi shores up some troubled investments
Having taken six wobbly SIVs onto its balance sheet, the bank announces it will bolster them with another $3.5 billion.
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| The new execs at Citi, Merrill, and the other banks need to get their shipwrecked companies back on course. |
NEW YORK (Fortune) -- Citigroup announced last night that it will provide an additional $3.5 billion in support for six troubled structured investment vehicles (SIVs) it brought on to its balance sheet last year. The move allows the six vehicles - Beta Finance, Centauri Corp, Dorada Corp, Five Finance, Sedna Finance and Zela Finance - to maintain their credit ratings from Moody's Investor Services, which reaffirmed its Prime-1 ratings for their vital commercial paper and medium-term note programs.
A Citi spokesman described the move as merely fulfilling the obligation the bank made when it decided to bring their liabilities in house.
On December 13, Citi brought the reeling SIVs onto its balance sheet - despite being originated and managed by the bank, they were considered legally distinct companies - after one of the SIVs, Sedna Finance, had its ratings chopped 12 notches on December 4. Prior to the ratings move, the SIVs net asset value had declined by about 54 percent in about one month.
Citi's SIVs, long ignored as sleepy short-term arbitrage vehicles, had been at the center of the intensifying credit storm since autumn. The vehicles had gotten in trouble as the short-term money markets dried up in the late summer and early autumn. The SIVs, unable to roll their commercial paper facilities due to borrower concern over the credit quality of assets backing its debt - often sub-prime asset-backed securities - were forced to sell assets to repay investors, frequently at distressed prices. This locked in sharp losses which triggered automatic liquidations for several larger, London-based SIVs.
At one point, with nearly 50 percent of the $100 billion SIV market under its corporate umbrella, Citi (C, Fortune 500) was tagged as the reason behind the now aborted Treasury Department-initiated attempt to create the M-LEC, or master liquidity enhanced conduit, designed to provide a captive and willing buyer for SIV assets. The plan, which had at best indifferent support from Wall Street's investment banks, largely collapsed once Citi's then newly minted chief executive Vikram Pandit decided to bring the SIVs onto its balance sheet.
In ordinary times, or at least a market-cycle where a credit crisis didn't threaten to imperil economic growth globally, the move would be seen as a positive sign that Citi had stabilized a nettlesome reputational and balance sheet problem. But these aren't ordinary times, and SIV news - even marginally good news - isn't going to placate jittery investors as they weigh Citi's position in the ongoing collapse of the leverage loan markets and its continued multi-billion dollar CDO exposure. 
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