[NYTr] Banks Pooling Billions to Stop Securities Sell-off

[All the News That Doesn't Fit]

The New York Times - Oct 14, 2007
http://www.nytimes.com/2007/10/14/business/14bank.html

Banks May Pool Billions to Stop Securities Sell-off

By Eric Dash

Several of the world's biggest banks are in talks to put up about $75
billion in a backup fund that could be used to buy risky mortgage
securities and other assets, a move designed to ease pressure on a
crucial part of the credit markets that threatens the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other
financial institutions, have been meeting to come up with a plan to
create a fund that could prevent a sharp sell-off in securities owned by
bank-affiliated investment vehicles. The meetings, which began three
weeks ago, have been orchestrated by senior officials at the Treasury
Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as
tomorrow, according to people with knowledge of the discussions, but
many important details still need to be hammered out. Another round of
discussions is taking place this weekend, and it is still possible that
the parties will not reach an agreement.

"Treasury is very serious about getting some solution in place to take
away the fear hanging over the markets," said Alex Roever, a credit
analyst at JPMorgan Chase who has been following the discussions but is
not involved in them. "It is a very challenging thing to do. There are
so many parties involved and they all don't agree.

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital
Management, when a group of big banks came together to prevent the fund
from collapsing after it made a series of bad bets. And the current
round of crisis-driven collaboration illustrates the heightened level
of concern among both government and financial players.

While there are signs that the broader credit markets have begun to
stabilize after the Federal Reserve lowered interest rates last month, a
pocket of the commercial paper market remains under siege: structured
investment vehicles, known as SIVs. The fear is that problems with these
vehicles could infect the broader economy.

SIVs, which issue short-term notes to invest in longer-term securities
with higher yields, are often organized by banks but are not actually
owned or held by them. They are supposed to be financed through the
issuance of commercial paper backed by pools of home loans and credit
card debt, but the loss of confidence in the quality of subprime
mortgage bonds has also tainted these securities.

Analysts say that investors have all but stopped buying SIV-affiliated
commercial paper, and the worry is that the 30 or so SIVs will unload
billions of dollars of mortgage-related assets all at once. That would
put intense pressure on prices. As Wall Street firms and hedge funds
mark value of similar investments they held to their new lower values,
they face potentially huge hits to their profits.

Still, the impact on the biggest banks is even more severe. In times of
crisis, they are committed - either legally or to maintain their
reputations - to stepping in to buy those securities. Banks have already
been buying significant amounts of commercial paper in recent weeks,
even though they did not have to. But if they are forced to bring those
assets onto their balance sheets, they might be less willing to lend to
businesses and consumers. That could set off a credit crunch and thrust
the economy into a recession.

The proposal being floated calls for the creation of a "Super-SIV," or a
SIV-like fund fully backed by several of the world's biggest banks to
provide emergency financing. The Super-SIV would issue short-term notes
to finance the purchase of assets held by the SIVs affiliated with the
banks, with the hope of reassuring investors.

But whether the banks would buy the assets directly or just buy the
short-term debt is still unclear, according to people briefed on the
situation. So are other aspects, like the amount of capital each bank
would need to contribute, how it would be administrated, and the fee
structures and cost burdens.

The effort to create a backup fund began about three weeks ago, when the
Treasury secretary, Henry M. Paulson, called a meeting in Washington
that included the chief executives of Citigroup, Bank of America,
JPMorgan and other big banks. With Wall Street firms having almost no
luck finding buyers for mortgage-backed securities and derivatives, Mr.
Paulson wanted to see what could be done to relieve the bottleneck.

Several rounds of discussions followed - in Washington, New York and on
conference calls - led by two senior Treasury Department officials:
Robert Steel, the under secretary for domestic finance and a former
Goldman Sachs executive who is a close adviser Mr. Paulson; and Anthony
Ryan, a former investment banker who is now assistant Treasury
secretary for financial markets.

Besides hearing from senior executives from each of the big banks, the
group also sought ideas from others. Several big international banks,
including Barclays and HSBC, have been asked about their interest in
participating. The group also reached out to several of the major
structured investment funds, as well as big institutional investors in
the commercial paper markets.

Edmund L. Andrews contributed reporting.