[DEBATE] : Societe Generale rescues SIV fund to avoid fire sale

[Riaz K Tayob]

Societe Generale rescues SIV fund to avoid fire sale
    
Submitted by cpowell on 03:27PM ET Monday, December 10, 2007. Section: 
Daily Dispatches

By Sebastian Boyd and Gregory Viscusi
Bloomberg News Service
Monday, December 10, 2007

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoqP2ef8rtgM&refer=h...

Societe Generale SA, France's second-biggest bank by market value, will 
bail out a $4.3 billion fund after losses related to the collapse of the 
U.S. subprime-mortgage market to avoid a fire sale of assets.

Societe Generale is following London-based HSBC Holdings Plc and 
Rabobank Groep NV of Utrecht, Netherlands, in rescuing structured 
investment vehicles. Societe Generale was "very close" to having to cede 
control of its Premier Asset Collateralized Entity Ltd., or PACE, to an 
outside trustee, Standard & Poor's said Dec. 7.

"They jumped before they were pushed to avoid being forced to sell 
assets," said Nigel Myer, a credit analyst at Dresdner Kleinwort in London.

Societe Generale will take on assets including $387 million of bonds 
backed by subprime mortgages, the Paris-based bank said in an e-mailed 
statement today. Societe Generale rose 1.23 percent to 107.85 euros 
($158.65) as of 4:20 p.m. in Paris.

The bailouts by Societe Generale, HSBC, and Rabobank further limit the 
role of the proposed $80 billion "SuperSIV" fund being set up by 
Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. and 
sponsored by U.S. Treasury Secretary Henry Paulson.

The so-called master liquidity enhancement conduit, or M- LEC, is aimed 
at addressing the fallout from U.S. home loan defaults. Investors have 
shunned the short-term debt used by SIVs to finance purchases of 
higher-yielding securities because of concern about holdings related to 
mortgages.

Subprime loan delinquencies reached a 20-year high in the third quarter, 
according to data from the Mortgage Bankers Association.

The rescue will cause Societe Generale's ratio of Tier 1 assets, a 
measure of financial strength, to fall by 5 basis points, Societe 
Generale said in its statement, citing "market conditions" for the 
decision. The bank said last month that its Tier 1 ratio was 7.7 percent 
at the end of September.

"The modest impact on the capital ratio shows that this move makes good 
sense," said Salah Seddik, a fund manager at Paris-based Richelieu 
Finance, which oversees $7.3 billion. "The worst seems to be over and we 
are heading back to normalcy, but it's still a sector to be cautious 
about," said Seddik, who doesn't hold Societe Generale shares.

SIVs are designed to get cheaper financing by borrowing in the 
short-term commercial paper market. They invest the money in 
higher-yielding assets and pay the returns to holders of their 
longer-dated capital notes, which rank after commercial paper for 
repayment and are first in line for losses.

Societe Generale's PACE is among $105 billion of SIVs that Moody's 
Investors Service may downgrade in its biggest wave of rating cuts since 
subprime mortgages caused credit markets to slump.

The value of the French bank's own $103.5 million investment in capital 
notes sold by PACE fell 73 percent to $27.6 million at the end of 
November, the bank said.

Bonds backed by home loans, including subprime debt, comprise 12 percent 
of PACE's holdings, Societe Generale said. Collateralized debt 
obligations make up another 19 percent. Debt guaranteed by monoline bond 
insurers accounts for 18 percent and bonds backed by other debt such as 
student loans represent 26 percent.

"This is more than manageable in terms of size for Societe Generale, 
albeit it is not of the best quality," said Tom Jenkins, a credit 
analyst at Royal Bank of Scotland Group Plc. "The match-funding avoids 
fire sales."

Credit-default swaps, contracts used by investors to speculate on credit 
quality, were unchanged at 36.5 basis points, or 36,500 euros to cover 
10 million euros of Societe Generale's debt, according to Deutsche Bank AG.

French banks so far have reported smaller losses from subprime holdings 
than U.S. and European competitors. Moody's said in a Nov. 23 report 
that no changes in ratings are warranted at this point.

UBS AG, Europe's largest bank by assets, said today it will write down 
U.S. subprime mortgage investments by $10 billion, the biggest loss by 
any European bank, and replenish capital by selling stakes to investors 
in Singapore and the Middle East.