The "inflate or die" fund...under the placid surface

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. Paul Volcker, Apr. 10, 2005

Paul Volcker's sense that something was rotten "under the placid surface" came to mind while reading news of the letter begging for inflation which inspired Friday's post or today's news that those same financial institutions were thinking of setting up a new fund.

Leading U.S. banks have reportedly been meeting with U.S. Treasury officials about creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch.

I'll go further and put 2 and 2 together. On the one hand many of the largest financial institutions in the world are asking financial authorities to, expand the range of acceptable collateral and increase the availability of “cross-border collateralisation” so banks can trade in a wider variety of risky assets in return for short-term loans to finance their activities and clients. On the other hand these same institutions are thinking about setting up a new fund (and what's a new fund without a nice new jargon-rich name like Structured Investment Vehicle) into which they will "park" their non-performing mortgage (et. al.) debt.

If you're wondering how such a "placid surface" is maintained, consider this. If you knew that you could hide your bad investments in some drawer and they wouldn't come back to bite, you wouldn't need to worry about stop loss selling, or anything of that sort. In that event you could just keep buying.

According to Reuters, taxpayer money is not expected to be used. Of course, if the Fed and other CBs are willing to accept the "assets" in these new funds as collateral then, ultimately, it doesn't much matter if the Treasury funds the endeavor (which the Fed would eventually monetize) or if the Fed monetizes it directly. If one thinks of the US$ as the stock of the United States, this is dilution, no matter how you slice it.

On Monday I'm going to explore these Structured Investment Vehicles (SIVs), mainly because I too want to be able to make a bunch of really stupid investments and then push them off my balance sheet, at the expense of the Fed, mind you. Inquiring minds want to know how to do it.