Smith is pessimistic about the prospects for this proposed superconduit.
(The press is all over the story this morning: you can start with the NYT,
FT,
WSJ,
and Bloomberg,
although there’s much more where that came from; that said, however, real details
are still very hard to come by.)
Smith is no exception as far as the blogosphere goes, where the reaction seems
to range from this-won’t-work all the way to this-is-illegal. Certainly there
are huge obstacles, mainly on the asset-pricing front, to getting this thing
off the ground, and if the NYT is right that the superconduit won’t hold any
subprime-backed paper, then the participating banks are going to be left holding
significantly more toxic SIVs than they have right now.
But I hold out a tiny glimmer of optimism. A large amount of SIV debt is
being rolled over: the short-term credit markets haven’t seized up completely.
But some of the most risk-averse buyers of commercial paper have, reasonably
enough, decided that SIVs are simply too opaque to trust, and are investing
instead in CP that is more transparent. I see the superconduit as an attempt
to regain the trust (and capital) of those very cautious and risk-averse investors:
it will be backed not by one bank but by many, and it carries too the imprimatur
of Treasury, which implicitly will not allow it to fail.
This plan, then, wouldn’t work in the midst of a fully-blown crisis of confidence
where no one was buying any CP at all – but that’s not what we have. And
the superconduit just might, at the margin, bring a few players back into the
CP game who got a bit wobbly-kneed back in August.