HSBC Bails Out 2 Troubled Funds
- HSBC Holdings PLC, Europe's largest bank, said Monday it will bail out two troubled funds it manages by transferring about $45 billion of their assets onto its balance sheet.
- HSBC said it will also inject $35 billion into the two funds, Cullinan Finance Ltd. and Asscher Finance Ltd., in a move that will clarify responsibility for the funds and prevent liquidation of their assets.
- The funds are "structured investment vehicles" or bank-sponsored businesses that sell short-term debt but have been operated off the bank's balance sheet.
- Structured investment vehicles, or SIVs, are bank-sponsored businesses that sell short-term debt -- such as unsecured commercial paper -- to investors such as hedge funds. The banks use the proceeds to buy longer-term assets, like mortgage-backed securities.
- SIVs normally generate money through fees and the difference between short-term and long-term rates. But in August, demand for short-term assets dried up, creating liquidity problems for SIVs.
- The viability of an SIV relies on its ability to continue borrowing money. Amid this year's flight from risk, lenders in the commercial paper market have frequently balked at letting borrowers "roll over," or extend, their debt. This is what is happening to most of the world's roughly 30 SIVs, which collectively manage about $320 billion.
- Earlier this month, bankers from Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. announced an agreement on a multibillion-dollar fund to buy distressed debt securities. HSBC, whose SIVs are among the largest in the market, said it would not be participating in that fund.
