by Calculated Risk on 11/11/2007 10:09:00 AM

NOTE: See update on NAV in post.

From the NY Times: Banks Said to Agree on Credit Backup Fund

The country’s three biggest banks have reached agreement on the structure of a backup fund of at least $75 billion to help stabilize credit markets ...the proposed fund could begin operating by the end of December ...

Henry M. Paulson ... acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.

Originally the Super Fund was going to buy only the best assets from the SIVs to provide liquidity - but I guess people realized that wouldn't help. Now, apparently, the Super Fund will buy anything:

... the fund will not distinguish between the assets it buys from each SIV; instead, it will assign the same risk level to all their troubled securities.

If the Super Fund will buy anthing, it will likely end up with the worst assets. From Reuters: Fitch may cut Citi's Sedna-managed SIV notes

Fitch Ratings on Friday said it may cut its ratings on notes from a structured investment vehicle managed by Citi Alternative Investments, called Sedna Finance ...

"The rating action reflects Fitch's view that significant refinancing requirements in the first quarter of 2008 might have to be covered by asset sales, leading to a realization of net asset value (NAV) losses," Fitch said in a statement.

The NAV of the notes is now 72.5 percent, Fitch said.

"Fitch recognizes that there is no imminent pressure for Sedna Finance to sell assets, as the vehicle is funded into January 2008," Fitch said. "However, significant amounts of funding mature in the first quarter of 2008."

This low NAV isn't unique to assets held by Citigroup managed SIVs. On a conference call on Thursday, Moody's says some SIV NAVs have fallen below 50%

... that the average NAV across the SIV sector has fallen from 101% at the beginning of July to 71% at the beginning of November

UPDATE: I misread the NAV here, and the difference is important. (hat tip jck at Alea Blog) From Fitch Ratings: Rating Performance of Structured Investment Vehicles (SIVs) in Times of Diminishing Liquidity for Assets & Liabilities See: NAV Deterioration on page 11.

As the prices of the underlying assets of the SIV decline the NAV of the capital note reduces at a magnified level due to the 14 times leverage found on average within the SIV market. Hence, a 0.5% price drop on all assets across the portfolio would result in the NAV declining by 7%.

Click on graph for larger image.

During the past 10 weeks, Fitch has observed the NAV of each SIV to decline. The above chart presents the weighted-average NAV of the Fitch-rated SIVs. In early July, the weighted-average NAV was slightly above par. However, over the past ten weeks it has reduced down to 76%.

So, using a NAV decline to 71% (from Moody's), the underlying asset losses are around 2% for an average SIV. With the NAV at 50%, the loss would be closer to 3.5%.

This reminds me of when Bernanke talked about an "orderly" decline in the housing market:

... Federal Reserve Chairman Ben S. Bernanke said [May 18, 2006] that the U.S. housing market ... slowdown is "moderate" and "orderly" ...

Now Paulson is talking about an "orderly demise" for these SIVs.

Perhaps "Orderly" is the new "Contained".