Faced with no viable outside near-term options to shore up its structured investment vehicle (SIV) programs, HSBC decided to come up with a plan of its own. Last week, the bank announced that it will take the assets of its two SIVs, Cullinan Finance and Asscher Finance, and consolidate them into one SIV.

"We believe that HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher," said Stuart Gulliver, chief executive of the bank's corporate, investment banking and markets division.

Sources expressed an overall support for HSBC's intended go-at-it-alone action. The only other current solution would be to participate in the SIV bailout conduit M-LEC, which is being formed by Bank of America, Citigroup and JPMorgan and which is intended as aid for smaller banks that can't get enough liquidity to roll over their SIVs.

"There is something around $200 billion in SIVs floating around, and we have just solved $45 billion of that," said a source at HSBC. "Now we needn't be concerned with overhang from Cullinan and Asscher."

According to HSBC, the current market has made it difficult for the bank's SIVs to roll over senior funding with commercial paper or medium-term notes. In addition, pressure continues to squeeze Cullinan and Asscher, as the market value of assets continues to decline, which is robbing the vehicles of necessary operating flexibility, explained HSBC.

However, "the credit quality of the assets owned by the two SIVs remains strong with an average asset rating of Aa1'/AA+', and no downgrades of any asset-backed securities or structured finance securities to date," HSBC said. But despite this, the bank doesn't see a better way out for its SIVs, other than taking the $45 billion onto its balance sheet.

JP Morgan Cheers HSBC

JPMorgan Chase released a statement in praise of the move, commenting that the bank is protecting both its junior and senior investors and helping to restore confidence by creating an immediately usable source of funding. "This is vastly preferable to raising liquidity by selling portfolio assets well below par, and [it] should spare mezzanine and income noteholders from liquidity-related losses," JPMorgan said. In addition to stable debt ratings, HSBC has also created a model for other banks to follow.

However, another market observer expressed skepticism about HSBC's plans, saying he felt HSBC was merely taking a less painful route than a possible wind-down, where "all that triple-A paper would go into a fire-sale market," he said. That it happened to be a good move for the market was coincidental.

The bank was chiefly worried about the damage SIV wind-down could pose to its reputation, he added. "The idea may sound silly, but consider how much retail business HSBC does and how crippling the loss of street-side activity can be, particularly in the case of embattled lender Northern Rock, which saw most of its retail business dry up in a bank run after customers learned that the bank had received funding from the Bank of England," he said. "So if your SIVs go to the wall, then what does that say about you?"

An analyst at a European investment bank said the decision to allow a swap of existing income notes and mezzanine notes for notes issued by a new HSBC vehicle or vehicles would please investors, especially since the new vehicle(s) would be backed either by commercial paper or a 100% liquidity facility, or even by term financing. But what's important, he said, is that one of the biggest investors in Cullinan and Asscher is HSBC itself.

Self-Serving Motive?

"I don't think this is some kind of charitable act," he said. "It's just an opportunity to make money, especially since I would estimate that a good proportion, around 15%, of the SIVs' capital notes are held by HSBC." Those notes would be the first to go in a wind-down, he added. "This is the best way for the bank to capitalize and recoup mark-to-market losses."

The source at HSBC said the bank does hold capital notes in the two SIVs, which isn't unusual for these kinds of vehicles, but the 15% estimate is overboard. "We aren't even at 14%," he said. "We are much lower."

"This is not meant as a criticism of other solutions or to serve as competition," the source said. "We decided we could offer a complete solution, one with certainty for investors, one with no question marks."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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