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Generational Dynamics Web Log for 15-Oct-07
Big banks discuss mind-boggling "M-LEC" superfund to bail themselves out.

Web Log - October, 2007

Big banks discuss mind-boggling "M-LEC" superfund to bail themselves out.

Citigroup, JPMorgan and Bank of America, with US Treasury help, prolong the coverup.

As we've been saying, financial firms have been increasingly using deceptive or fraudulent practices to avoid having to sell the securities that they manage. Why? Because they got investors to pour money into funds backed by these securities by valuating the securities at notional prices that can't be sustained in the marketplace. Many of these securities are CDOs and other credit derivatives based on sub-prime mortgage loans that now have very high default rates.

The firms have been using a variety of practices to avoid selling these securities. Practices include: refusing to reveal prices of assets to investors; hiding at-risk securities in separate "black-box" corporations known as SIVs (structured investment vehicles); negotiating deceptive or fraudulent sweetheart deals with other financial firms to establish artificial "market values" for assets.

For these firms, a sale of these securities must be avoided at all costs.

And now, huge new deceptions based on the mother of all SIVs are about to be announced. And it's been endored by US Treasury Secretary Henry Paulson, so it MUST be ok.

We won't know all the details until the announcement, possibly on Monday, but it goes something like this: Citibank doesn't dare sell any of its vast holdings of questionable securities in an open market, because that might show them to be nearly worthless. Also, Citibank can't buy the securities from itself, because that wouldn't make sense (as if anything else does).

Soooooooooooo, Citibank (actually Citigroup), in conjuction with JP Morgan and Bank of America, is going to set up a ... wait for it! ... a Master-Liquidity Enhancement Conduit, or M-LEC.

These three firms will put $100 billion dollars into the M-LEC. Most of the money will come from Citibank; the other two firms will sit back and collect fat fees. Citibank will be able to sell its questionable securities to the M-LEC at whatever notional price it wants.

It's still Citibank's money buying Citibank's questionable securities, but since the money is laundered through the M-LEC, it's an "open market" sale. So Citibank can thus establish a "market price" for its questionable securities.

Both the American and British governments have been encouraging additional banks to participate in the M-LEC, but there have been no further announcements.

Why are these governments endorsing this deception? Because they fear another major credit crunch, like the one that almost brought down Wall Street in August.

To me, this appears to be a move of total desperation. And a new week begins. (15-Oct-07) Permanent Link
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Generational Dynamics Web Log for 15-Oct-07 Big banks discuss mind-boggling "M-LEC" superfund to bail themselves out.

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Generational Dynamics Web Log for 15-Oct-07
Big banks discuss mind-boggling "M-LEC" superfund to bail themselves out.