Citigroup quietly unloads toxic SIVs to junior investors

By Paul J. Davies, David Wighton, and Adam Jones
Financial Times, London
Monday, December 10, 2007

http://www.ft.com/cms/s/0/e35b3628-a769-11dc-a25a-0000779fd2ac.html?ncli...

Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15 billion in two months through quiet side deals with some junior investors, according to people familiar with the business.

The news that the troubled US bank has been finding ways to offload assets from its structured investment vehicles (SIVs) without resorting to fire sales comes as Societe Generale on Monday became the latest bank to announce a bailout for its own $4.3 billion vehicle. SocGen's decision follows similar moves by HSBC, Standard Chartered, and Rabobank in the past fortnight.

The moves appear likely to reduce the demand for the so-called "super-SIV," conceived by Citigroup, Bank of America, and JPMorgan with the backing of the US Treasury as a buyer of last resort for the industry that would prevent fire sales.

SIVs, which sell cheap, short-term debt to invest in higher-yielding, longer-term assets, have been at the centre of the credit squeeze as investors have ditched exposure to anything tainted by US subprime mortgages.

Citi on Monday refused to comment on asset sales by its seven SIVs -- all of which have been put on watch for downgrades by the rating agencies -- but people familiar with the vehicles say their size has been cut from $83 billion at the end of September to about $66 billion largely by selling pro-rata portions of a SIV's portfolio of assets to investors in the most junior notes at market values. Citi is also talking to some investors about directly swapping their holdings for underlying assets.

The SIV industry's problems are causing headaches for US money market funds, which are big investors in their debt. Bank of America said on Monday that it was winding down its Columbia Strategic Cash Portfolio, after losses on holdings of paper sold by SIVs. The fund is an "enhanced cash" fund, a riskier form of money market fund sold only to institutions.

BofA has frozen cash redemptions from the fund but is allowing investors to put their share of the assets into a separately managed accounts, handled by BofA. These "redemptions in kind" have reduced the assets in the fund from about $33 billion two weeks ago to $12 billion.

BofA said that most investors have opted to stay in the fund which will be wound down as the underyling securities mature. BofA will not charge any further fees on the fund, which has a net asset value of 99.4 cents on the dollar.

BofA said last month that it would spend $300 million supporting an institutional cash fund.

General Electric's asset management unit last month repaid investors in its GEAM Trust Enhanced Cash Fund at 94 cents on the dollar.

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