Master Liquidity Enhancement Conduit

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The Master Liquidity Enhancement Conduit, also known as the "Super SIV", was a plan announced by three major banks based in the United States in October 2007 to help alleviate the subprime mortage financial crisis. On 21 December 2007, cnn.com reported that the "Super SIV" fund plan was being abandoned, and that the banks had stated the plan was "not needed at this time". [1]. A number of private banks pledged to support individual SIVs. In February 2008, Standard Chartered, soon after promising support for the Whistlejacket SIV, abandoned the fund. Orange County, California has $80 million invested in Whistlejacket.

On October 15, 2007 three major banks, (Citigroup, JPMorgan Chase and Bank of America) announced a plan to stave off damage from the housing-related debt crisis by forming the Master-Liquidity Enhancement Conduit (MLEC)^[1]. Due to a tightening of the credit markets linked to the 2007 Sub-Prime Crisis, a number of structured investment vehicles (SIVs), backed by major banking institutions, found themselves less able to obtain short-term financing on the open market, which they need in order to ensure their continued operations. Complicating the problem is the fact that many of the investment securities held by SIVs are valued by a computer model^[2] developed by the securities holder. The Mark to Model process is similar to certain tactics used to support the Enron accounting fraud, where assets were assigned values that benefited the company’s bottom line. Many of the securities' valuations can be found in the company's financial report as level 3 assets.

The credit crunch, along with pricing difficulties resulting from the Mark To Model process, caused fears that the SIVs might be forced to sell off their assets at "fire sale" prices, far below their stated value. The resulting flood of bargain priced asset-backed securities (ABS) could further destabilize the credit markets and perhaps force the parent institutions to place the SIVs on their balance sheets, indirectly reducing the amount of money the banks could then loan.

The Master-Liquidity Enhancement Conduit is intended to facilitate the short term refinancing these SIVs require, thus avoiding the risk of a self-reinforcing downward spiral in the ABS markets.

Some consider this a privately funded way to bail out large financial institutions that made bad bets in the housing market. Part of this criticism results from Citigroup's involvement as Citi has the largest exposure in SIVs, and there is some concern that MLEC will only delay problems, not lead to solutions.^[3]

The United States Department of the Treasury has played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson has championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel taking the initiative in bringing the banks together for the plan.^[4] Others have questioned the legality of fund participants' ability to work in concert, supporting price discovery in certain illiquid positions held by the SIVs, in light of United States anti-trust law.^[5]

On October 19, 2007 Wachovia and Fidelity joined in the creation of the MLEC.^[6]

The value of the fund may reach as much as $400 billion worth of investment securities.