Dude, where’s my liquidity?

PennyMac Mortgage Investment Trust is planning to buy up newly issued loans and package them into bonds. A posting at Bloomberg has the scoop today. The conduit arm of PennyMac would buy the mortgage loans as short-term investments. It sounds promising in terms of short-term funding, but the question remains whether this conduit vehicle will last: Has the industry already forgotten the short-lived MLEC dreams? Master Liquidity Enhancement Conduits, sometimes called Super SIVs (structured investment vehicles), were the solution to the credit crunch, developed in 2007 by the private equity market. MLECs were meant to encourage short-term funding, but plans were short-lived. The conduit vehicle raises a question of liquidity, both then and now. Total US asset-backed commercial paper (ABCP) oustandings fell by $8.6bn in the week ending November 4 to $454.7bn — from a $1.2trn peak, according to Credit Suisse Securities commentary. The outstandings have slipped back to their early-2000 level. As the conduit market is essentially an off-balance-sheet vehicle, liquidity challenges might arise with upcoming changes in accountancy guidelines for off-balance-sheet transactions. Changes to accountancy guidelines set to take place Jan. 1, 2010 revamps accountancy standards for off-balance-sheet transactions. The changed rules require assets and liabilities of special purpose entities (SPEs) to come onto the balance sheet of the issuer, servicer or special servicer. Forcing banks to account for these assets and liabilities essentially overnight on January 1 would present a significant financial burden if capital requirements are not loosened. And financial firms with off-balance-sheet transactions are increasingly being scrutinized by regulators. Federal Deposit Insurance Corp. (FDIC) chairman Sheila Bair, in comments Tuesday, indicated large financial holding companies should be subject to tougher prompt corrective action standards under US law. She also said they should be subject to holding company capital requirements that are no less stringent than those for insured banks. “Off-balance-sheet assets and conduits, which turned out to be not-so-remote from their parent organizations in the recent crisis, should be counted and capitalized as on-balance-sheet risks,” Bair said. Write to Diana Golobay.