Three of the US' largest banks, working together at the behest of the Treasury Department, were expected to announce yesterday morning that they are creating a large fund to serve as a buyer of bonds and other debt at a time when many investors are avoiding them.
Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co will create a fund, called a conduit, that will be able to buy around US$75 billion to US$100 billion in highly rated bonds and other debt from structured investment vehicles (SIVs). Those vehicles own mortgage-backed bonds and other securities and have had trouble obtaining financing since early August, when the credit markets froze up.
The effort is intended to help SIVs that need to sell securities do so in an orderly manner.
Bank and government officials are concerned that if these vehicles are forced to dump billions of dollars worth of debt in the coming weeks, it could cause a repeat of the crisis that rattled markets in August and sent the cost of mortgages and other loans soaring.
The joint effort is a result of more than a month of negotiations between bankers and government officials in Washington and New York. The talks picked up pace over the weekend, with bankers in New York and officials in Washington holding round-the-clock conference calls, according to people involved in the talks. Many details remain unresolved, but the banks planned to announce yesterday a broad framework for how the fund will operate.
The conduit is expected to start operating in 90 days and will stay in place for a few years until it has disposed of the assets it buys, people familiar with the negotiations said.
To maintain its credibility with investors from whom it would raise money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings -- AAA and AA -- and debt that is backed by other mortgages, credit card receipts and other assets.
Each of the banks will put up an unspecified amount of its own capital into the fund, and other banks from around the world are expected to join the consortium in the coming weeks. The conduit will raise most of its money by selling commercial paper, which is a form of short-term debt like Treasury bills but is issued by banks, corporations and investment vehicles.
The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.
One analyst, Christian Stracke of the research firm CreditSights, said the effort appears to be an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities. He noted that many of the banks participating in the fund had already been working on their own to ease problems at SIVs.
"For me, this is more of a PR blitz," he said. The banks are "saying, `It's not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury,' which gives it a veneer of respectability."
Stracke said that by serving as another buyer of the highest-rated securities, the banks are hoping to ease the immediate strain on SIVs, which could be forced to sell billions of dollars worth of assets in a fire sale if they are not able to raise new financing and when their capital falls below certain thresholds. The effort, however, will not resolve the longer-term problem many SIVs face with more risky mortgage bonds, he said.
SIVs issue short-term debt that uses the money to invest in longer-term securities with higher yields. There is about US$300 billion in such vehicles, which are often organized by banks but are not actually owned or held by them.
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