Citi and Rabobank Pull the Plug on Their SIV

Pop quiz: You're managing an investment vehicle with 10 billion euros' worth of long-term illiquid assets, such as mortgage-backed securities funded by short-term debt and commercial paper. Now some of that debt is coming due, you can't refinance it, and it's tough to sell assets to pay back debtholders. What do you do?

You bite the bullet and start selling assets. Fast.

This was the situation Citigroup (NYSE: C  ) and Dutch bank Rabobank found themselves in, as managers of a 10 billion-euro structured investment vehicle (SIV) called Tango Finance. Fortunately, Tango was able to sell off 4.5 billion euros' worth of assets to pay off maturing debt.

Not much information was released about the sell-off, but given that neither bank announced any major losses, the liquidation appears to have been done in a relatively orderly fashion. Sometimes, SIV managers are on the hook if the SIV can't refinance, because of liquidity guarantees. In this case, neither bank made such guarantees. However, the banks were still exposed to reputational risk if the SIVs collapsed, so the liquidation provided some relief.

Another key data point that emerged from the liquidation was that, according to a Rabobank spokesperson, the value of the remaining assets is about 97 to 98 cents on the dollar. While a 2%-3% loss isn't pleasant for something with an AAA credit rating (and Moody's (NYSE: MCO  ) is thinking about lowering that rating), it's not a huge disaster, either.

In all, the credit markets may take it as a slight positive that Tango was able to liquidate without too much disruption. The big test, however, will be how HSBC (NYSE: HBC  ) fares with the $45 billion of SIV assets it had to assume, as well as the fate of the $75 billion "super SIV" organized by major banks including JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) .

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