Banks Set Plan to Revive Credit Market

16 years ago

Banks Set Plan to Revive Credit Market

Monday October 15, 11:10 am ET

By Joe Bel Bruno, AP Business Writer

Bank Consortium Unveils Fund to Buy Distressed Securities, Prop Up Credit Market

NEW YORK (AP) -- The nation's three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up.

The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.

That followed a crisis in the mortgage industry, as people defaulted on their home loans at a skyrocketing rate. It caused a widespread aversion to risk and led the Federal Reserve to pump money into the financial system, though the latest plan relies more heavily on the banks themselves.

The Treasury Department introduced the idea of a bailout in recent talks with Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co and others. It was not known how much money would be put into the fund, but there have been reports it could be between $80 billion to $100 billion.This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets," the Treasury Dept. said in a statement Monday

The government's role in coming up with a private-sector solution to the nation's credit problems is similar to the bailout of hedge fund Long-Term Capital Management in 1998. The Fed approached Wall Street's biggest banks to rescue LTCM before its wrong-way financial bets set off a financial shockwave.

This time around, the banks hope to not only prevent credit problems from spreading -- but also are bailing themselves out. They operate structured investment vehicles, known as SIVs, that reportedly have as much as $400 billion worth of assets. Those could plunge in value unless the credit markets are stabilized.

The SIVs used short-term commercial paper, sold at low interest rates, to buy longer-term mortgage-backed securities and other instruments with higher rates of return. With the seizure of the credit markets, many SIVs had trouble selling new commercial paper to replace upcoming obligations on older paper.

The new fund -- called the Master Liquidity Enhancement Conduit or M-LEC -- would launch in the next 90 days and be used to buy distressed securities from SIVs. That would in turn give them the capital to pay off their commercial paper obligations, and ultimately extricate themselves from what otherwise might have been substantial losses.

By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper.

The funds' backers said they will shy away from risky instruments and buy only highly rated, asset-backed debt --a market that is already beginning to show signs of life.

Here is a link that might be useful: Banks Set Plan to Revive Credit Market

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Comments (4)

mfbenson
16 years ago
last modified: 9 years ago
A related story to this one is how the US Treasury department is holding the talks. At first glace this was upsetting to me, because I thought it meant that A) the credit crunch is much worse than is generally known, and B) taxpayer-backed bonds are going to finance the relief.

However, in the fine details, it was revealed that the Treasury's only role is that of a facilitator to get companies (who are competitors) to work together to help solve the crisis and that there is no taxpayer money at stake.

There is still a lot of talk of a bailout and taxpayers are not totally off the hook yet (of course) but it might not be as bad as it first seems.

Especially if lenders are allowed to value SIV's on their books at the prices they want (which, as any accountant will tell you, is a fictional number.) Yes, I'm kidding in this last comment.
triciae
16 years ago
last modified: 9 years ago
Here's a more detailed article from Bloomberg:

"While the banks are still deciding which assets to buy, the entity will purchase highly rated securities, the banks said. It probably won't buy subprime mortgage assets..."

(See link below for full article)

Seems like it boils down to they will bail each other out? Don't see how it much helps Mom & Pop trying to sell their house though? Guess, in time...if the commercial paper markets get moving again it will filter down?

Don't think this has anything to do with bailing out the sub-prime homeowners that Congress is yaking about. This is more about helping the banks hold off further erosion in their marks and, maybe, a prime AAA lender like Thornburg may have an easier time accessing the commercial markets?

/t

Here is a link that might be useful: Bloomberg article...
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richard_f
16 years ago
last modified: 9 years ago
I think that the banks would have to do something to prop up the book value of the SIV's anyway, in the same way that the mutual fund companies will buy bad debt out of a money market fund portfolio to keep the share value from falling below $1.00. Doing it publicly as part of a consortium gives them some good publicity and helps to boost investor confidence.
try_99
16 years ago
last modified: 9 years ago
If they are high quality securities then why not the banks just buy them as investments and reap the profits when they appreciate?..why go through all this hassle of creating another joint fund to manage this paper?

The ideas is to transfer these mark to model securities onto to newer fund at the artificially high price and avoid reporting losses on their books

Banks Set Plan to Revive Credit Market

Comments (4)

mfbenson

triciae

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richard_f

try_99

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