October 16, 2007 (LPAC)--One of the United States' leading analysts on financial risk, told EIR on October 16, that the proposed Master Liquidity Enhancement Conduit (M-LEC) scheme will not function, and probably won't even get off the ground. He predicted a wave of bank failures. "What is so good about rolling up hundreds of billions worth of illiquid assets-- these SIVs [Structured Investment Vehicles] and conduits-- into one super-conduit?

"Seriously, this won't even come into existence. Once you go over the terms of the new super conduit [M-LEC], who would purchase from it? Why would investors purchase Citigroup's SIV assets when they are in a super-conduit, when the same investors wouldn't purchase Citigroup's SIV assets, when Citigroup offered them separately?"

He said that "In Europe, the banks are done with SIVs, they have already been hit. I understand that within a few weeks, Moody's and some Europeans are going to come down hard on the SIVs."

This source said, "the banks created this. They created assets and liabilities off-balance sheets, like SIV's and derivatives. They made a lot of money, now there is a problem."

He warned, "This is going to get worse. By the middle of next year, banks are going to have solvency crises-- bank failures. The banks have two types of risk. First, trading book risk from the SIV's/conduits that they set up. Second, they have problems on their books, like from home mortgage loan defaults, and other types of default, which are going to get bigger. As they mix, banks are going to fail, like we had in the 1990s [the S&L failure]."

He underscored that Citigroup is in serious trouble, saying "the U.S. banks don't have sufficient equity for what's ahead. The ratio of their equity to their assets is 8%; they need 25%. All of America's bank holding companies have collectively $110 billion in capital. But Citigroup could suffer $20 to $40 billion in losses; they don't have enough capital. The U.S. banks don't have enough capital to handle their on-balance sheet and off-balance sheet losses."

The source called a "legal fiction" the banks' claims that the banks, and the SIVs and conduits that they have set up, are "separate entities." He observed, "the banks sponsored the conduits; picked the Trustee and directors of the conduits; set up the service provider for the conduits, and lent the conduits money. The conduits issued commercial paper to pay back the banks." They are one and the same.

He asserted that one of the directions in which the crisis may be heading "is a federal bail-out. But the banks' problems are too big; it is too big to bail out."

Lyndon LaRouche has called the hyperinflationary bailout schemes, like the Goldman Sachs-inspired M-LEC, dangerous stupidity which benefits the British Empire, acting in the mode of the mating of preying mantises. "The female partner already engaged in consuming the head of its male partners, such as the Goldman-Sachs group, is British, presently disguised as the Bank of England."