Citigroup (C) was always understood to be the prime beneficiary of the SuperSIV plan. But this week, Eric Dash dropped hints that Citi had been working on a Plan B, saying that "Citigroup, the financial giant that first proposed the initiative, is devising a separate rescue plan".
Yesterday, the FT filled in more of the blanks:
Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15bn in two months through quiet side deals with some junior investors, according to people familiar with the business...
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 $83bn at the end of September to about $66bn 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.
I can see how this deal makes some sense on both sides. If I own the short-term junior debt of an SIV, I really have nowhere to turn. But if I swap that debt for long-dated, higher-yielding assets, there is maybe some light at the end of the tunnel. Meanwhile, Citi gets to effectively unwind the SIV without relying on The Entity – something which still hasn't got off the ground, and which no one is placing an enormous amount of faith in.
If Citi can carve off some large chunks of its SIVs, it might be able to reduce the rump vehicles to something digestible – at which point Citi's brand-new CEO can take them onto the bank's balance sheet as part of his fresh new strategy or somesuch. But there's still a fair amount of pruning to go before that happens: I don't think Citi can really afford to take anything like $66 billion of SIV assets onto its balance sheet right now. Maybe that's where The Entity can step in, taking on maybe half of what's left and leaving the remainder for Citi to mop up.