A new wholesale bank is born.  The UK Treasury has provided more details about its Asset Purchase Facility (APF), a £50 billion fund, financed by Treasury Bills & managed by the Bank of England, which will buy corporate debt, commercial paper, syndicated loans & asset-backed securities.  The stated objective of the APF is to “increase the availability of corporate credit” by making purchases which “would be most likely to restore the flow of finance to corporate borrowers”.  The plan is to wind down this fund as “normal conditions return”, i.e. when corporate credit spreads have tightened back into historical ranges, mostly by allowing existing assets to mature (rather than pressuring the market with a £50 bln overhang of paper).

The BoE has been directed to publish a quarterly account of the APF’s transactions together with an assessment of developments in corporate debt markets.  These accounts are sure to be eagerly awaited by the market – given that the BoE has been directed to buy “high quality assets”, any company which gains the BoE seal of approval will surely see its credit spreads tighten.  But then again that is the purpose of the APF, to tighten spreads and improve liquidity in the corporate debt market.

Whilst the prime objective is not to make money, the APF most certainly will – pots of it.  With 5-year investment grade corporate debt currently yielding in excess of 6% and Treasury Bills yielding less than 1%, this is going to be a good business for the UK taxpayer to get into (and I can’t see any of the APF’s profits being paid out to BoE employees in bonuses either).  But if this is such a great idea – why didn’t anyone think of it before..?  Well, Citigroup did when they invented the Structured Investment Vehicle (SIV) in 1988.  Like all banks, SIVs borrowed short & lent long (in their case buying bonds financed by issuing commercial paper).

Citigroup’s idea lasted 20 years until August 2007 when worries about losses on SIV’s assets caused commercial paper investors to refuse to lend the SIVs any more money.  Game over.  Whilst all the existing SIVs were closed down or went bankrupt post-August 2007 (Sigma Finance, the last surviving SIV went into liquidation in October 2008), the APF mirrors the idea perfectly.  The APF won’t suffer funding problems because Treasury Bills will always find buyers and any losses the APF suffers will be covered by the Government.  A 5% spread on £50 bln implies profits of £2.5 bln annually (credit losses will be non-existent as any company enjoying access to APF funding is highly unlikely to go bankrupt), the APF will prove to be a source of revenue which the Chancellor is going to be reluctant to shut down.  The SIV is dead, long live the SIV.