Interest Rate Roundup

Friday, December 14, 2007

Citigroup's SIV drama

Late yesterday, Citigroup said it will take over seven suffering structured investment vehicles, or SIVs, assuming $58 billion in debt in the process. SIVs are these wonderful financial innovations that major financial institutions have devised (You know, like those other great products -- CDOs of CDOs, subprime RMBS and so on and so forth). They sell short-term debt and use that money to buy longer-term debt.

That works great ... until investors decide they don't want to buy SIV-issued paper. When that happens, things get ugly and SIVs can find they have to liquidate assets, driving prices lower. The Citigroup move is designed to allow the SIVs to wind down in an orderly process, rather than be forced to hold "fire sales."

So this is "good" news, right? Well, it might have been if Moody's didn't decide to spoil the party by cutting Citigroup's debt rating. Specifically, the credit ratings agency lowered Citigroup to Aa3 from Aa2. That's the fourth-highest rating.

It's not clear how this will all sort out. U.S. dollar and British pound LIBOR rates are down a bit more overnight, but Citigroup shares were recently under a bit of pressure and Euribor rates (the euro-based equivalent of LIBOR) haven't done much.

Oh and as I write, we're seeing more evidence of housing market downturn fallout. Tool maker Black & Decker is slashing its Q4 earnings target to $1.03 a share, excluding a tax settlement. Analysts had been looking for $1.60 a share. The company said "business conditions in North America have been worse than the Corporation had anticipated."


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