An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed

Tyler Durden's picture

Confused about the latest attempt by an insolvent French banking cartel to sugarcoat what they are doing in Greece? Don't be. After all this is nothing but a repeat of a failed idea first floated back in October 2007, when a Super SIV was supposed to shore up the hundreds of billions of toxic subprime debt while packaging it in a tidy off-balance sheet little packet. Presenting the MLEC part deux. And yes. Back then the idea crashed and burned because it was understood it would be a total disaster. If it passes beyond the production stage this time, it really is game over for the ponzi extend and pretend brigade.

From Wikipedia:

The Master Liquidity Enhancement Conduit (MLEC), also known as the Super SIV (structured investment vehicle), was a plan announced by three major banks based in the United States on October 15, 2007, to help alleviate the subprime mortgage financial crisis. Citigroup, JPMorgan Chase, and Bank of America created the plan in an effort to stave off financial damage.[1] Due to a tightening of the credit markets linked to the crisis, a number of structured investment vehicles (SIVs), backed by major banking institutions, found themselves less able to obtain short-term financing on the open market,
which they need in order to ensure their continued operations, due to
investors concerns about the SIVs exposure to subprime mortgages.
Complicating the problem was the fact that some of the investment
securities held by SIVs are valued by a computer model[2] developed by the securities traders and investment banks. The mark to model
process is used by all financial instiutions where a deep and liquid
market does not exist. Many of the securities' valuations can be found
in the company's financial report as illiquid and hard to value level 3 assets.

The credit crunch, along with pricing difficulties resulting from the
mark to model process, caused fears that the SIVs might be forced to
sell off their assets at "fire sale" prices, far below their stated value. The resulting flood of bargain priced asset-backed securities
(ABS) could further destabilize the credit markets and perhaps force
the parent institutions to place the SIVs on their balance sheets,
indirectly reducing the amount of money the banks could then loan.

The Master Liquidity Enhancement Conduit was intended to facilitate
the short term refinancing these SIVs require, thus avoiding the risk of
a self-reinforcing downward spiral in the ABS markets.

Some considered this a privately funded way to bail out large
financial institutions that made bad bets in the housing market. Part of
this criticism resulted from Citigroup's involvement, as Citi has the
largest exposure in SIVs, and there was some concern that MLEC would
only delay problems, not lead to solutions.[3]

The United States Department of the Treasury played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel taking the initiative in bringing the banks together for the plan.[4]
Others questioned the legality of fund participants' ability to work in
concert, supporting price discovery in certain illiquid positions held
by the SIVs, in light of United States antitrust law.[5]

On October 19, 2007, Wachovia and Fidelity joined in the creation of the MLEC.[6]

The value of the fund was projected to reach as much as $400 billion worth of investment securities.[citation needed]

On 21 December, 2007,
reported that the Super SIV fund plan was being abandoned, and that the
banks had stated the plan was "not needed at this time".[7]. A number of private banks pledged to support individual SIVs. In February 2008, Standard Chartered, soon after promising support for the Whistlejacket SIV, abandoned the fund. Orange County, California has $80 million invested in Whistlejacket.

h/t Paolo