What Are Conduits?

Here’s the headline carried by Reuters and the Washington Post, State Street faces exposure to conduits: report and the Timesonline has the story as State Street bank has highest exposure to conduits

State Street, the American bank, has been identified as having $22 billion (£10.9 billion) of exposure to asset-backed commercial paper conduits, the off-balance sheet vehicles that have caused severe problems for rivals in recent weeks amid turmoil in credit markets.

[…]

These conduits – packages of retail and commercial loans financed by short-term debt raised in the commercial paper market (asset-backed commercial paper
(ABCP) conduits set up in Europe by banks, mostly to invest in longer-term high-quality securities.) – have become of increasing concern to investors amid fears that banks will have to fund the debt from their own balance sheets if these vehicles are unable to sell on their maturing paper.

State Street has 17% of its assets exposed to $22 Billion of conduits.

State Street’s percentage makes it the most highly exposed bank to conduits among its European and American peers, the report added.

HBOS Plc HBOS.L (London Stock Exchange) is on the hook for $35 Billion and Standard Chartered also has exposure. Thisismoney.com writes

Banks find conduits attractive because they are an offbalance sheet means of financing their mortgage and other loan books by selling short-term maturity commercial-paper and medium-term bonds.

Seems to me that the banks have done what they always do that gets them into trouble, that is “borrow short and lend long.” Once again this tactic has bitten them. The asset-backed commercial paper couldn’t be rolled over because the quality of the collateral became suspect both as to quality and price.

STT appears to me to have formed a massive top in the last year amd may be abouy ready to break down.

Conduits State Street (STT) HBOS Plc

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