HSBC was the first major player to say no to the Super-SIV bailout program by directly providing $35 billion in funding to SIVs.

HSBC said it’s moving Cullinan Finance and Asscher Finance, the two SIVs, onto its balance sheet to prevent a forced liquidation of what it called “high-quality assets.” If HSBC did not make the move, the vehicles were at risk of triggering market value or net asset value restrictions that would’ve prompted sales of the debt portfolios. The bank said it is providing up to $35 billion in funding, and its balance sheet will expand by $45 billion.

On December 3 WestLB, HSH Nordbank Bail Out $15 Billion of SIVs.

WestLB provided a credit line for its $11 billion structured investment vehicle called Harrier Finance to repay commercial paper, the Dusseldorf-based bank said in an e-mailed statement today.

HSH Nordbank said it will provide backup funding to cover all commercial paper issued by its 3.3 billion- euro ($4.8 billion) Carrera Capital SIV, spokesman Reinhard Schmid said in an interview.

By contrast, Citigroup, the largest manager of SIVs, said it will avoid any steps that would force it to consolidate the companies on its balance sheet.

MBIA Inc., the largest bond insurer, has cut its Hudson- Thames Capital SIV to about $400 million from $2 billion by asking capital note holders, who own the lowest ranking debt, to buy the fund’s assets, Chief Financial Officer Chuck Chaplin said last week.

Treasury Secretary Henry Paulson has been working with Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks, to form an $80 billion “SuperSIV” fund to help avoid forced sales by buying SIV assets. The Treasury aims to have the master liquidity enhancement conduit, or M-LEC, running by yearend.

“Every day that goes by we are seeing more restructuring and liquidity provision by sponsors,” Shah said in an interview today. “The longer M-LEC takes, the less of a need there will be for it.”

Markets Move Faster Than Bureaucrats

While Paulson is hoping to have a bailout plan in place by the end of the year, the only participants left to bailout might be Citigroup (C), Bank of America (BAC), and JPMorgan (JPM).

What’s left of Paulson’s Super-SIV plan has more holes in it than a stack of colanders. Obviously the market moves faster than bureaucrats.

Why don’t Citygroup, Bank of America, and JPMorgan take the assets onto the balance sheet like the other banks are doing? Because they can’t. At least Citigroup can’t. Citigroup already had to sell 4.9% in equity to Abu Dhabi in return for $7.5 billion in cash as noted in Petrodollars Return Home.

Indeed, the Citigroup / Abu Dhabi deal smells of desperation, a thought noted by Professor Mark Bloudek in Citigroup: The Real Deal.

So why was CDO exposure so secret?

The real outrage of the credit crunch has been in the way major banks disclosed potential losses. The next credit scandal is there are billions more in undisclosed risk.

Citigroup had off-balance sheet conduits with assets totaling $73 billion as of Sept. 30. Almost every major banks has significant conduit exposure. But if conduits are becoming a problem, banks are not saying much about it in their financial statements.

So why was CDO exposure so secret?

Banks typically arranged and sold CDOs to investors, so the sold ones would not appear on their balance sheets. In quarterly financial statements, companies disclose their “variable interest entities,” or VIEs. These are entities to which a company has actual or potential economic exposure. When it comes to inadequate CDO disclosures, the VIEs that matter are those that are not consolidated on a company’s balance sheet.

This is partly the fault of the accounting rule — something called FIN 46-R — that governs off-balance sheet VIEs. The big problem is that it doesn’t force companies to disclose realistic estimates for losses. Under FIN46-R, companies must disclose their maximum loss exposure. That sounds like a conservative approach, but in practice it isn’t. That’s because banks often add comments in financial statements that effectively tell investors not to take these maximum loss numbers seriously.

Take a look at Citigroup’s second quarter filing, posted Aug. 3, which was well into the summer credit meltdown. In it, the bank said actual losses from its unconsolidated VIEs, which included $75 billion of CDOs, were “not expected to be material.” It has since estimated losses could be between $8 billion and $11 billion (which is most definitely material).

So the question becomes: Did banks have a good idea of what off-balance-sheet CDO losses would be before they were disclosed? The answer to that is: Almost certainly.

Is protection of Citigroup itself the only reason left for the Super-SIV?

I think so and Fortune is raising the same issue in Why Citi can’t take the high road over credit mess.

As soon as the SIVs got into trouble in the summer, the most obvious solution was for the banks affiliated with the SIVs to take them onto their balance sheets. The fact that none of them did so straight away raised a red flag over the SIV mess.

Instead, the U.S. Treasury sponsored a move driven by Citigroup, J.P. Morgan Chase and Bank of America to set up a new, larger Super SIV that would buy up assets from the SIVs that came under pressure. Since Citigroup has by far the largest exposure to SIVs – its seven SIVs held $83 billion of assets as of Sept. 30 – the Treasury’s Super-SIV looked very much like a way of supporting Citigroup.

As more banks drop support for the Super-SIV bailout plan, it is becoming increasingly clear the only remaining purpose for the plan is to keep Citigroup from having to put SIVs on its balance sheet.

Mike “Mish” Shedlock
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