Fear of price discovery is rampant in the banking system. Citibank and Bank of America are trying to fund a super-SIV to take over the assets of their “conduits.” HSBC, Europe’s biggest bank, today announced that it would support its two structured investment vehicles — Cullinan and Asscher — with funding of up to $35 billion to prevent forced sales of assets. The goal here is the same - to preserve “mark-to-model” pricing on assets that are probably nearly worthless if sold, despite high ratings. Buyers know that the ratings are essentially useless, because they can go from AAA to C overnight. Fear of that happening means no bids for the paper. The truth is, nobody really knows what this paper is worth because the multilayered and leveraged structures make it completely inscrutable. For example, structures like CDO-squared contain debt that has been sliced first in to MBS, then into CDOs, then into the CDO-squared. There is no direct relationship between the mortgages at one end and the payments at the other, because they are governed by the different tranches and their priority rules. Buyers don’t want a pig in a poke, especially when they know that the mortgages in the first place are probably under-collateralized.

So, not knowing how to solve this, they are trying to buy time. Writing off these securities or selling them in the open market is simply not an option, the hit to capital would be way too large. Cutting interest rates won’t help this problem, this is not a liquidity problem, this is a solvency problem. There is genuine fear that we could see a large bank fail.