European banks led by HSBC and Deutsche Bank may be tempted to join a US-led fund to take over assets of investment vehicles sent reeling by a global credit crunch.
Top US banks led by Bank of America, Citigroup and J.P. Morgan said on Monday they were setting up a fund to bail out structured investment vehicles (SIVs), which many banks have set up to invest in high-yielding securities.
Many of the SIVs - off-balance sheet vehicles holding some $370 billion in assets that rely on short-term financing to make a return - are struggling to stay afloat as investors shy away from buying their commercial paper. Although setting up a similar fund in Europe might be complicated because of different regulatory frameworks in each country, some European banks may clamber on board the US fund, which is being established under US Treasury auspices.
"The Americans will make it sound like Nato where they do the heavy lifting and the Europeans can skim along on their coat-tails," said a London-based banking analyst, who asked not to be identified.
The US Treasury could even encourage European banks with significant US interests, such as Deutsche Bank, HSBC, UBS and others, to join the fund. "I think the Treasury's overall plan is to get all major global banks involved," said a Managing Director at a credit rating agency.
The aim of the fund is to save the SIVs from making a fire-sale of assets which could send prices into a downward spiral and force more writedowns on banks' balance sheets. That would in turn constrain the ability of banks to lend money and keep the wheels of a slowing US economy turning. Top investment banks such as Bear Stearns and Merrill Lynch have had to mark down losses in structured credit portfolios on their balance sheets.
Leading candidates to join the US bailout fund are Deutsche Bank, with a big stake in an entity called Gordian Knot which manages more than $52 billion of SIV assets, and HSBC, which runs two SIVs with around $42 billion of assets, say analysts.
"I don't think there is a lot of advantage in setting up a rival (European) pool," said a London analyst with a leading US investment bank. "It's perfectly possible that if they (Deutsche Bank) are worried about further writedowns and asset sales at Gordian they may be more inclined than the other Europeans to jump in."
Although the US plan addresses dollar assets in SIVs, it appears that most of the European SIV exposure is in dollars as well, said the analyst. UBS, which earlier this month announced it would take a 4 billion Swiss franc ($3.39 billion) writedown on its fixed income portfolio, does not have a major exposure to a SIV and may be less interested in taking part.
Its rival Credit Suisse, although it has been an active player in structured finance, does not have major SIV exposures either, say analysts. European banks with significant interests in the United States may feel they have little choice but to pony up funds.
"You would rather not take part unless by not participating you have a material impact on the outcome," said Simon Maughan, at MF Global Securities, referring to European banks. "But it might not take long before you are invited to join and you might want to do it as advertising," he said.