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KAI RYSSDAL: We give you as exhibit A, in the continuing liquidity squeeze, the Federal Reserve Bank of New York. The New York Fed’s the go-to place for Wall Street banks short of cash, as so many of them are these days. Today, Fed officials said they’re ready to plow another $8 billion into the market. They’re also going to make it easier for banks to borrow that money.
Exhibit B bears the ticker symbol C. Shares of Citigroup were pummeled today. There were reports the country’s biggest bank could be looking at tens of thousands of layoffs as the subprime fallout spreads.
And finally, exhibit HSBC. Europe’s largest bank is going rescue two of its structured investment vehicles, or SIVs. You’ve heard that acronym before. All you really need to know, before Marketplace’s Amy Scott takes over, is that SIVs have taken a beating from recent woes in the mortgage and credit markets. And it’s going to cost HSBC $35 billion to make things right
AMY SCOTT: Banks like HSBC hold these structured investment vehicles off their balance sheets. So while a bank might set up an SIV, it’s not technically responsible for any losses. Peter Crane, of Crane Data, says that doesn’t mean the bank wouldn’t take the blame.
PETER CRANE: I guess a way of putting it would be, your kid becomes of legal age, but if he does something wrong the police might come to you to back him.
Today HSBC said it will move the two SIVs onto its balance sheet. It’ll also pump as much as $35 billion into the funds to avoid a fire sale of their assets.
CRANE: They don’t want to do it. But it’s the lesser of evils.
Small investors could benefit too. Crane says, money market funds invested about $6 billion in one of the SIVs. HSBC’s structured vehicles aren’t the only ones in the shop. SIVs make money by selling short-term debt, and investing in longer-term securities, like mortgage-backed bonds. Several U.S. banks, including Citigroup and Bank of America, are setting up a special fund to buy those securities. Standard and Poor’s analyst Richard Barnes says, HSBC wanted its own solution.
RICHARD BARNES: I think it’s seen as more of a U.S. solution, and HSBC’s decided to follow its own path.
Barnes doesn’t think funding the two SIVs will hurt HSBC’s bottom line. But the bank is still assessing the damage from the subprime mortgage meltdown. Today analysts at Goldman Sachs warned that HSBC may have to set aside another $12 billion to cover bad debts.
In New York, I’m Amy Scott for Marketplace.
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