GE Exits CP and managed cash fund management

GE Bond Fund Investors Cash Out After Losses From Subprime

By Christopher Condon and Rachel Layne

Nov. 15 (Bloomberg) -- A short-term bond fund run by General Electric Co.'s GE Asset Management returned money to investors at 96 cents on the dollar after losing about $200 million, mostly on mortgage-backed securities.

The GEAM Trust Enhanced Cash Trust, a short-term bond fund with about $5 billion in assets, told non-GE investors on Nov. 8 that they could withdraw their money before losses mounted. Enhanced cash funds usually offer higher yields than money- market funds by investing in riskier assets.

All outside investors, who together held ``several hundreds of millions of dollars'' in the fund, pulled their money, Chris Linehan, a GE Asset Management spokesman in Stamford, Connecticut, said yesterday in an interview. Most of the fund's money before the redemptions came from GE's corporate pension plan and remains invested.

Enhanced cash funds ``never promised to be stable value, though investors may have believed that,'' said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter. There are a number these funds ``under duress,'' he said.

Barron's first reported the GE fund's losses yesterday.

Linehan said the losses were from mortgage-backed securities, including those linked to subprime home loans. He couldn't say how much the fund had invested in mortgage debt. The fund didn't own collateralized debt obligations, which are securities backed by pools of bonds and loans, or commercial paper or notes issued by structured investment vehicles, known as SIVs.

Taking More Risk

The collapse of the subprime-mortgage bond market, caused by rising defaults by home buyers with poor credit histories, has driven down global debt prices as investors flee all but the safest investments.

Some money managers market enhanced cash funds, as well as ultra short-term bond funds, as alternatives to money funds, which are considered the safest investments outside of insured bank accounts and government debt. Money funds are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings. Money funds strive to maintain a $1 a share net asset value.

Short-term bond funds have more leeway to boost yields by buying lower-rated securities. Some have run into trouble amid the credit squeeze, including the $1.4 billion State Street Limited Duration Bond Fund, which lost more than a third of its value in the first three weeks of August, the Boston Globe reported Aug. 28.

Money Funds

Several money-market funds have recently shown signs of strain from subprime-related holdings. Bank of America Corp., the nation's second-largest bank, said Nov. 13 that it may provide as much as $600 million to funds that bought asset- backed securities. Legg Mason Inc., SEI Investments Co. and SunTrust Banks Inc. also have stepped in to make sure investors don't lose money by arranging financing so their funds don't fall below the $1 a share net asset value, known as ``breaking the buck.''

Funds that channel mortgage debt to other investors, such as SIVs, have also come under stress. Unable to refinance their debt, SIVs including Cheyne Finance Plc have defaulted.

Worried that the turmoil among SIVs will further hurt the commercial paper market, banks have rallied behind U.S. Treasury Secretary Henry Paulson's efforts to put together what's being a called a Super-SIV, to be run by Bank of America, Citigroup Inc. and JPMorgan Chase & Co.

The Super-SIV would buy assets from SIVs in an attempt to prevent a forced sale of the roughly $320 billion in assets held by the 30 entities.

GE Asset Management, a unit of Fairfield, Connecticut-based GE, oversees more than $198 billion for individual and institutional investors, as well as pension funds for its parent company.

Blackrock and Goldman bets on credit crunch to impact financials

BlackRock's Fink Says Subprime Credit Losses to Rise (Update4)

By Sree Vidya Bhaktavatsalam

Nov. 13 (Bloomberg) -- Laurence Fink, who helped create the market for mortgage-backed securities, said the credit losses that have already cost banks and securities firms $45 billion are about to get worse.

Fink, chief executive officer of New York-based fund manager BlackRock Inc., said today at an investor conference that ``many institutions don't understand what the credit crunch is going to do to earnings and their balance sheet.'' At the same conference, Goldman Sachs Group Inc., CEO Lloyd Blankfein said his firm is continuing to bet that mortgage-backed securities and collateralized debt obligations will fall.

The outlook is another indication that the contagion from losses on mortgages to people with poor credit is continuing to spread. Bank of America Corp. Chief Financial Officer Joe Price said the second-largest U.S. bank may write down $3 billion of subprime-related debt in the fourth quarter.

At the investor conference in New York, sponsored by Merrill Lynch & Co., Blankfein said Goldman, the world's most profitable investment bank, doesn't plan to take any significant writedowns on mortgage-related assets. Goldman shares rose 8.5 percent to $233.04 at 4 p.m. in New York Stock Exchange composite trading, and other financial stocks also climbed.

``We continue to be net short in these markets,'' Blankfein, 53, said in response to a question about the New York-based firm's position.

Financial Shares Rally

Banks and brokerages in the Standard & Poor's 500 Index have rallied 7.6 percent since reaching a two-year low on Nov. 7. Bank of America, based in Charlotte, North Carolina, climbed 5.2 percent today to $46.27. Lehman Brothers Holdings Inc. jumped 9.2 percent to $63.49 after UBS AG analyst Glenn Schorr said the New York-based securities firm's potential CDO losses are ``negligible.''

``I don't know when it's over, but it's not over yet,'' Fink, 55, said. ``The bottom has not been achieved yet.''

The selloff of financial stocks had gained steam after Merrill Lynch announced a record $8.4 billion credit writedown on Oct. 24, which led to the ouster of CEO Stan O'Neal. Deutsche Bank AG yesterday said credit losses may reach $400 billion, while Lehman last week predicted losses would reach $250 billion over the next five years.

At the same time, money managers including Bank of America and Baltimore-based Legg Mason Inc. have collectively set aside almost $500 million to prop up money-market funds that invested in debt issued by structured investment vehicles, known as SIVs.

Money-Fund Trouble

The 10 largest managers of U.S. money funds have about $50 billion in short term debt of SIVs, some issued by vehicles such as Cheyne Finance Plc that defaulted as investors shunned the funds on concerns about losses from securities linked to subprime mortgages, according to reports from the companies.

``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Gregory Peters, head of credit strategy at Morgan Stanley said in an interview in New York. ``That's all toppling at once.''

JPMorgan Chase & Co. CEO Jamie Dimon said SIVs, whose assets have dwindled by at least $75 billion since July, will ``go the way of the dinosaur.''

``SIVs don't have a business purpose,'' Dimon, 51, said at the Merrill Lynch conference today.

New York-based JPMorgan joined Citigroup Inc. and Bank of America in forming an $80 billion fund to help revive the market for short-term debt. The banks are pushing to have the fund in place by year-end because SIVs have been unable to get credit as subprime mortgage losses drive investors from all but the safest debt. Their effort has been coordinated by the U.S. Treasury, run by former Goldman CEO Henry Paulson.

BlackRock

BlackRock, the largest U.S. publicly traded asset manager, has been in contact with the Treasury, Fink said. BlackRock will raise ``multibillion dollars'' to invest in distressed securities that are resulting from the ``chaos'' in the market, Fink said. He declined to elaborate.

Fink, who is the most likely candidate to be offered O'Neal's job, said today his firm has had a succession plan in place for at least two years.

``We have taken succession planning very seriously,'' Fink said. ``We have been focusing on it for two or three years; it has been a multi-year process,'' he said, without offering specifics. He did not say whether he has been offered the Merrill Lynch position.

PNC Financial Services Group Inc. CEO James Rohr, who sits on the board of BlackRock, confirmed Fink's earlier comments about succession planning. Rohr said in today's investor conference that he's not familiar with Fink's plans.

``I hope he doesn't leave,'' Rohr said, adding that BlackRock had ``a lot of talent.'' PNC holds 34 percent of BlackRock's stock, according to BlackRock's Web site.

Laurence Fink

Fink, formerly at First Boston Corp., was the youngest-ever managing director there when he got the title at age 29 in 1982. In 1983, while running the fixed-income department, he was one of two bankers to invent a security that repackaged mortgage-backed bonds into new securities with different responses to changes in interest rates, called collateralized mortgage obligations.

The other was Lewis Ranieri, whose tenure overseeing the business at Salomon Brothers is chronicled in Michael Lewis's 1989 book, ``Liar's Poker.''

Fink formed BlackRock as a bond specialist in 1988, with capital from New York-based private-equity firm Blackstone Group LP. Fink led the acquisition of Merrill Lynch's fund unit last year in a $9.4 billion deal. BlackRock's assets have since increased 31 percent to $1.3 trillion.

BlackRock shares rose 3.6 percent to $195.67.

Save the SIVs

SIV Situation:Will Rescuers Arrive in Time?

Banks' Plan Comes As Fund Woes Mount; Not a Silver Bullet

By CARRICK MOLLENKAMP, IAN MCDONALD AND VALERIE BAUERLEIN
October 24, 2007

(WSJ) As three of the world's biggest banks try to finalize a rescue plan for some shaky investment funds, the funds themselves face mounting problems.

The outlines of a new superfund -- an effort led by Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co. that may include at least seven other banks -- are still being hashed out, according to a person familiar with the situation. The three banks could present a formal structure to potential bank partners and funds as soon as next week.

Meanwhile, the funds at the heart of the situation -- known as structured investment vehicles, or SIVs -- need to find investors for $100 billion in debt coming due in the next six to nine months, even as ratings firms continue to come out with reports that lower the ratings of securities in moves that could further depress the value of SIV holdings.

SIVs sell short-term debt and then use the proceeds to buy longer-term, higher-yielding securities. But SIVs have had trouble in recent months selling debt, and some of their roughly $350 billion in assets are backed by U.S. mortgages -- a market that has seized up amid the housing slump and subprime-lending shakeout. Typically, money-market funds, municipalities and other risk-averse investors buy SIV debt.

The bank consortium would provide much-needed cash to the funds by setting up a superfund to buy highly rated securities from them. The superfund plan would aim to buy assets from the SIVs to prevent them from selling those assets en masse at today's depressed prices, something the banks and some regulators say could roil markets and the economy.

The plan, which the banks aim to finalize by month's end, could still fail or arrive too late to be of help. Besides tapping the superfund, SIVs are likely to restructure their debt, wind down or, in a worst-case scenario, become a dead SIV that can't pay debt investors.

Still, as the superfund negotiations continue, problems for SIV operators have worsened. Some SIV operators, such as Citigroup and Rabobank of the Netherlands, have been selling assets. In the United Kingdom, the Whistlejacket Capital Ltd. fund operated by Standard Chartered PLC is considering alternative funding plans, a Standard Chartered spokesman said.

Meanwhile, the types of assets held by some SIVs continue to come into question. Moody's Investors Service Inc. recently downgraded $33.4 billion of securities issued in 2006 and backed by subprime mortgages in moves that could make it more difficult for SIVs to unload assets.

Holders of SIV capital notes are bearing the brunt of the SIV fallout. Investors in capital notes typically supply an SIV with as much as 5% of its money. In return, these noteholders -- often European banks and insurers -- receive a share of the SIV's profits or losses. They are ranked lower than the other debtholders and thus could be the first to bear losses if SIVs sell assets to the banks' rescue fund.

Capital-notes holders face two options: risk losing money if the SIV sells assets to the banks' fund at a loss, or try to keep the SIV going by buying more of its debt. In recent days, SIVs have been trying to persuade capital-notes holders to buy medium-term notes to fund the SIVs and protect their investments, people familiar with the matter say. Some capital-notes holders -- and SIVs -- say they are skeptical about the banks' plan, because selling assets at today's prices will require the SIV and the notes holders to recognize a loss on those investments.

Capital-notes holders "profit if the SIV does well, but they lose their investment if there is a shortfall," says Geoff Fuller, an attorney at London firm Allen & Overy LLP, who advises clients including Citigroup on SIVs and other securitization projects.

U.K. mortgage lender Nationwide Building Society, for instance, recently invested a fraction of its assets in capital notes of several older, bank-sponsored SIVs, and says its holdings haven't been downgraded by ratings firms. Indeed, holders of notes in the shakier SIVs launched over the past two to three years, not those in older SIVs, are taking the worst lumps.

"We saw it as a potentially attractive risk-reward proposition," says Mark Hedges, Nationwide's head of structured finance. "We are monitoring the situation because it needs to be monitored, but we have a very modest portfolio."

Mr. Hedges, like other notes holders, says he is concerned the rescue fund could dilute the value of his investment. He adds he doesn't have enough information to make up his mind on the fund.

The lead banks have provided little public guidance on their plans for the fund, leaving themselves open to criticism. Executives working on the fund see it not as a silver bullet but as one of several options open to SIV operators, according to a person familiar with the effort.

The plan would benefit a lead participant, Citigroup, because it is a large operator of SIVs. The SIV industry has become a key part of the U.S. economy, because the funds buy securities backed by mortgage loans to U.S. home buyers. The industry, at its peak earlier this year, totaled about 30 funds with $400 billion in assets.

The three banks have many issues to work out, according to people familiar with the situation. They need to figure out how participating banks would divide any profits or shoulder losses when the rescue fund is wound down, according to people familiar with the plan. They need to decide if participating banks will be ranked based on how much funding they provide, just as banks take lead and supporting roles in stock offerings.

In recent days, the group has tried to bring in other banks. Wachovia Corp. plans to participate -- at a level likely below the three lead banks -- pending approval of a governance plan for the fund, said a person familiar with the situation. Germany's Dresdner Kleinwort, a unit of Allianz SE and operator of the K2 Corp. SIV, and Britain's HSBC Holdings PLC, the affiliate of the Cullinan Finance Ltd. SIV, are considering joining. Both are large SIV operators.

Banker, heal thyself

Banks seek life in the debt markets

Oct 16th 2007 | NEW YORK
From Economist.com

CAN a group of banks succeed where the monetary authorities have failed? Despite the best efforts of central banks to deal with the credit crunch that took hold over the summer, some debt markets remain dysfunctional. Buyers are still on strike in an important part of the market for commercial paper (short-term corporate debt): the bit in which so-called structured investment vehicles (SIVs), which have mushroomed in recent years, borrow in order to invest in higher yielding assets. Now many of those vehicles are finding it difficult to roll over their debts and the banks that stand to lose most from their demise are scurrying for solutions.

On Monday October 15th three of the largest banks launched the first big effort by the private sector to alleviate the crisis. Citigroup, JP Morgan Chase and Bank of America unveiled an agreement in principle for a fund, expected to be worth up to $100 billion, that would buy highly rated assets from troubled SIVs. Other financial institutions are said to be considering joining. Although no government money will be available, America’s Treasury played an important role in the talks that led to the fund’s creation. The authorities worry that “disorderly” markets could drag down the economy.

SIVs suffer from the same mismatch between assets and liabilities that afflicts regulated banks: they borrow short-term and invest long-term. This worked well when markets were humming along. But now the mounds of mortgage-backed securities and other assets that the vehicles hold have suddenly turned horribly illiquid and their market value—to the extent that it can be ascertained—has plummeted.

Some SIVs have had to sell assets at fire-sale prices to repay investors, many of whom have become reluctant to roll over debt. Since SIVs hold some $325 billion in assets, further forced sales could have a chilling effect on the prices of asset-backed securities across the board. Banks also worry that they might be forced to take the assets of SIVs they helped to set up on to their own balance sheets. That would put great strain on their capital ratios.

The new fund, which has been clumsily labelled the Master Liquidity Enhancement Conduit, or M-LEC, will buy commercial paper issued by SIVs and then issue its own short-term debt, which will be backed by the founding banks. It will buy assets at a “market price” but there is a twist. SIVs that sell discounted securities to the conduit will share in the gains if the paper subsequently rises in value. The aim is to overcome their reluctance to part with assets they consider undervalued by a barely functioning market.

Though comparisons have been drawn with the 1998 bail-out of Long-Term Capital Management, a hedge fund, there is a notable difference. Back then, the Federal Reserve brought banks together to help a failing counterparty. This time, there is an element of self-rescue. That is certainly true of Citigroup, which has set up more SIVs than any other institution; it is exposed to some $100 billion of assets held by such vehicles. The two other co-ordinating banks have no SIVs of their own. They seem drawn primarily by the fees they will be able to earn managing the conduit.

Whether the scheme works remains to be seen. It looks rather like the Resolution Trust Corporation that was set up to liquidate America’s failing savings and loan institutions in the 1980s, points out Brad Hintz of Sanford Bernstein, a research firm. But while the design is proven, the banks may struggle to reach agreement on a host of issues, not least the price at which to mark assets bought. Though the banks say they want to get the fund off the ground within 90 days, some analysts think it will never fly.

Even those who support the fund admit that it is, at best, a temporary solution. As one banker puts it, it is about buying time so that the real problems facing the debt markets can be sorted out. In the case of asset-backed commercial paper, the two biggest are the inherently unstable structure of SIVs and their lack of transparency. Not only do they sit off their creators’ balance sheets but they do not even have to publish their holdings. Only when these underlying issues are addressed is confidence likely to return.