The M-LEC Silk Purse

As I inquire about, and listen to comments concerning, the M-LEC structure being touted by the Treasury department, I hear similar responses to mine, about which I wrote earlier this week, here.

Last night, while working out at my fitness club, I ran into an old colleague from my days at Chase Manhattan Bank. Bill was a savvy, up and coming IT guy with a lot of business sense. Always well grounded amidst the false sense of grandeur that Chase still espoused in those days, he would frequently lampoon the senior management's "big cigahs and motorcahs.'

These days, Bill heads the American arm of a mid-sized European bank. He hasn't lost his sense of humor, as evinced by this exchange,

Me: Hey Bill, want to buy some structured finance instruments?
Bill: No thanks, I already have a bunch.
Me: Well, how about we each sell each other some troubled structured instruments at falsely-high prices, like Mike Milken used to arrange among his high yield customers at Drexel?
Bill: *Nods his heads and laughs heartily*

Funny, when you think about it, isn't it? What Milken was excoriated for allegedly doing twenty years ago is now being advanced by our Treasury as the way to alleviate the current SIV liquidity dilemma. What is frowned upon as securities market manipulation when done by an investment bank is considered proper when the Federal government sponsors the same behavior.

I don't actually think my friend's bank has much exposure to structured instruments. But when I asked what he thought of the M-LEC concept to save the SIVs, he agreed that it would make real market price discovery very difficult. And make it hard to know when 'normal' market conditions had returned for them, allowing the wind-down of the M-LEC.

Then he chortled, noting that, ironically, Bear Stearns, which triggered the whole mess with its two crippled mortgage-instrument hedge funds this past summer, has actually come out clean in the subsequent act two of this financial drama.

Then, this morning, on CNBC's Squawk Box program, guest host Jack Welch, when asked what he thought about the M-LEC idea, replied, to paraphrase the former GE CEO,

'You can wrap up this pig, but it's still going to be a pig.'

Just so.

He also, tellingly, referred to the 'three banks' which are now identified with the fund. Make that three commercial banks. As I wrote here, recently, it's evident that the investment banks are steering clear of buying into the master SIV concept.

One of the CNBC reporters mentioned that he had spoken recently with Larry Fink, of Blackrock, the now-partially-public private equity firm, concerning the M-LEC. He stated that Fink noted how market bottoms require written-down prices of damaged financial instruments. Without that market-clearing action, the market can't resume its growth.

The reporter went on to opine,

'And that's what this master SIV will do. It will allow these instruments to be marked down.'

But that's not true. The stated intent of the M-LEC is to allow crippled SIVs to exchange high quality instruments for cash, thus functioning as a stand-in to supply commercial-paper sourced liquidity to SIVs which can no longer access that market. Nobody, to my knowledge, nor according to the articles I've read, believes that the worst paper will be sold, at true, open market prices, to the M-LEC.