International
Top US banks agree on $100bn fund to support mortgage-linked securities
By Finfacts Team
Oct 15, 2007, 04:39

Department of the Treasury, 1500 Pennsylvania Avenue, Washington D.C.

Citigroup, Bank of America and JPMorgan are expected to announce today, plans for a fund to buy mortgage-linked securities in a move to allay fears of a downward price-spiral that would hit the balance sheets of big banks.

The Wall Street Journal says that the US banks collectively are expected to put up credit guarantees worth up to $100bn for the fund, named the Single-Master Liquidity Enhancement Conduit (SMLEC).

Under the proposed rescue package, the fund or "superconduit," will act as as a buyer of last resort. It will pay market prices for SIV (Structured Investment Vehicles, or SIVs, which are used by banks and others, are set up as a way to make money without taking the risk involved, onto their balance sheets.) assets in an effort to prevent dumping.

Bankers are reported to have said that the scheme would evolve with the market and may only be as large as demand requires. The SMLEC would be temporary and capped in value, and would not be backed by any state guarantee. Other banks are expected to join the syndicate.

The Journal says that the high-stakes plan to rescue banks from losses on mortgage securities amounts to a big bet that a consortium of financial giants -- at the prodding of the US government -- can persuade investors to pour more money into the troubled credit market.

Over the weekend, the US Treasury hosted talks and the Treasury Secretary Hank Paulson, former head of investment bank Goldman Sachs, hopes that the fund will jump-start demand for commercial paper, which froze up this summer amid the credit crunch that roiled global financial markets.

The Journal says companies depend on commercial paper to finance day-to-day expenses like payroll and rent. Some financial commercial paper -- known as asset-backed paper -- has been able to find buyers in recent weeks. But investors have remained skeptical of other types, including paper issued by certain bank-affiliated investment funds

The lack of buying signaled that the markets weren't working properly, despite the efforts of central banks, and that investor confidence was low, since commercial paper typically is considered a safe investment.