WASHINGTON — Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to set up a fund of about US$80 billion designed to help revive the asset-backed commercial paper market, according to people familiar with the discussions.
An announcement may come as soon as Monday, said the people who declined to be named because the decision isn’t public. The fund will buy assets from structured investment vehicles, units set up to finance purchases of securities such as corporate bonds and subprime mortgage debt.
Other banks may join the fund, which would help SIVs avoid selling their US$320 billion in holdings at fire-sale prices, further roiling the credit markets, the people said. The Treasury Department initiated the talks between the banks after a shut down of the commercial paper market left SIVs and other sellers unable to fund themselves, forcing sales of about US$75 billion of assets.
“Treasury and the banks are showing they’re willing to deal with this directly,” said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. “They’re taking nothing for granted. This will help to deaden the speculative forces.”
Treasury jump-started the talks between the banks with a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the Treasury’s top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Treasury Secretary Henry Paulson, a former chief executive officer of Goldman Sachs Group Inc., also made calls.
“Paulson definitely has the cachet to bring everyone to the table, because of his long experience on Wall Street,” said Joe Mason, associate professor of business at Drexel University in Philadelphia and a former financial economist at the Treasury’s Office of the Comptroller of the Currency.
The sudden increase in borrowing costs for companies and consumers in August threatens to worsen a housing recession that has slowed the pace of economic growth.
The fund will be known as the Master Liquidity Enhancement Conduit, or MLEC, the people said. The fund will buy securities rated AAA or AA at Standard & Poor’s and Aaa or Aa at Moody’s Investors Service at market prices, the people said. It won’t buy subprime mortgage assets, they said.
“This is mostly symbolic,” said Christian Stracke, a London-based strategist at CreditSights Inc., a New York bond research firm. “The banks were going to need to inject more liquidity into the SIVs anyway, so the public co-operation just makes the bail-outs of SIVs seem more orderly.”
Banks that sponsor SIVs have reputations to protect so they will act to support the financing vehicle even when they have no legal obligations to do so, Moody’s Investors Service said in a Sept. 5 report.
Citigroup managed SIVs with about US$100 billion of assets, according to JPMorgan Chase & Co. analysts.
Encouraging the talks that led to the creation of the fund is the latest effort by officials to help restore liquidity to credit markets, a campaign started by the Federal Reserve in August, when it cut the interest rate on direct loans from the central bank. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.
“Some markets have been experiencing illiquidity,” San Francisco Fed President Janet Yellen said in an Oct. 9 speech in Los Angeles, referring to mortgage-backed securities and asset- backed commercial paper. “This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities.”