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
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
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
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates hearing your comments, concerns, and complaints. The Motley Fool has a disclosure policy.