Bankers from Citigroup Inc, JPMorgan Chase & Co and Bank of America Corp have agreed on how to structure a multibillion-dollar fund to buy distressed debt securities almost a month after they announced plans for it, a source familiar with the situation said.
The bankers met on Friday to hammer out the details of how the fund will work, the source said, who asked not to be named because the details have not been publicly disclosed. Those details include how much specific participating banks will contribute.
Before the plan takes effect, it must be approved by the banks' senior corporate officers, tax attorneys and ratings agencies. Meanwhile, some investors and industry watchers say the fund will only help the banks involved.
The fund was the brainchild of Citigroup, which sees potential troubles in its structured investment vehicles (SIVs). Citigroup manages seven SIVs, with about US$83.1 billion in assets. Other major banks that manage SIVs are HSBC, Bank of Montreal, Societe Generale and Standard Chartered Bank.
The fund -- called the Master Liquidity Enhancement Conduit, or M-LEC -- would buy the short-term, asset-backed securities that SIVs must sell to fund their investments and stay in business.
The banks say that would, in turn, boost demand in the tight credit markets, which seized up this summer when investors started avoiding securities with exposure to subprime mortgages, which are home loans to risky borrowers.
JPMorgan and Bank of America do not manage SIVs, but they will collect fees through the fund.
They would also likely benefit because they are among the many banks that have been forced to put billions in losses on their books due to investments that have plummeted in value -- particularly in collateralized debt obligations (CDOs) that are sliced and repackaged bundles of debt.
A return to normalcy in the credit markets -- including a steady market for securities from SIVs -- could reduce losses at banks with CDO exposure.
"Getting some more time for the pricing process to occur is a healthy thing," Federal Deposit Insurance Corp chairwoman Sheila Bair said about M-LEC late last month. "It's most successful if no one has to use it."
The M-LEC plan -- prompted by the US Treasury Department after banks expressed dismay over a lack of demand in the credit markets -- has its supporters, but it has been criticized as a bailout for the banks.
"It's a bad idea overall, but a good idea for the three companies. It's a method of generating fees, but I don't see what it achieves for the market overall," Punk, Ziegel & Co analyst Richard Bove said.
Bove said demand created outside the marketplace is false demand and furthermore, the fund only intends to buy the least risky assets. That would leave the unwanted, subprime-mortgage-backed assets out there in the marketplace.