How the Superconduit Just Might Work

Yves 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.