Big Banks Mulling $100 Billion Fund to Limit Credit Crunch

Includes: BAC, C, JPM
by: Judith Levy

A group of the world's biggest banks, including Citigroup, JPMorgan and Bank of America, is discussing pooling up to $100 billion for an emergency fund that would buy at-risk mortgage securities to take pressure off the credit markets. The talks began three weeks ago at the instigation of the Treasury Department. The object of the fund, tentatively called the Master-Liquidity Enhancement Conduit, or M-LEC, is to avert the necessity for bank-affiliated funds to dump huge portfolios of mortgage-backed securities onto the market, an event that could inflate borrowing costs, force more major write-offs at banks, trigger significant investor losses, and conceivably send the U.S. into recession. SIVs (structured investment vehicles), which buy mortgage securities assets from banks and finance the purchases with commercial paper, must sell the assets if they cannot sell the paper -- and investors, spooked by the implosion of the subprime mortgage market, have almost completely stopped buying SIV-affiliated paper. "This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities," said San Francisco Fed President Janet Yellen last Tuesday. The banks are faced with the prospect that about 30 SIVs will simultaneously unload billions of dollars' worth of mortgage-related assets and send prices into a downward spiral. "We are coming off the greatest lending U.S. history. We will feel its impact for a very long time," said Robert Arnott, Chairman of Research Affiliates LLC.

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