Citigroup, Bank of America Lead Banks Creating Fund (Update2)
2007-10-14 19:00 (New York)


(Adds name of fund, analyst comment from 10th paragraph.)

By Mark Pittman and Elizabeth Hester
Oct. 14 (Bloomberg) -- Citigroup Inc., Bank of America
Corp. and JPMorgan Chase & Co. will announce as soon as tomorrow
that they are establishing a fund of about $80 billion aimed at
reviving the asset-backed commercial paper market, said people
familiar with the plan.
The fund, to which other firms will probably contribute,
will buy some assets from structured investment vehicles, or
SIVs, the people said. SIVs are units set up by banks, hedge
funds and other investors to finance purchases of securities,
including corporate bonds and mortgage debt.
The Treasury Department encouraged the banks to work
together, and it jump-started the talks 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 fund would help SIVs, which own $320 billion of assets,
avoid selling their holdings at fire-sale prices, further
roiling the credit markets. 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.

Restore Liquidity

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 on
Aug. 17, when it cut the interest rate on direct loans from the
central bank. A month later, the Fed cut its benchmark rate by
half a point to 4.75 percent. Fed officials 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.''

Bear Stearns Funds

Rising mortgage defaults by Americans with poor credit
histories prompted the collapse in June of two hedge funds
managed by Bear Stearns Cos. and triggered a worldwide rout in
the debt markets.
As losses in securities linked to subprime mortgages
started to spread in July, investors retreated from high-risk
assets. SIVs that issued commercial paper to buy the securities
found they could no longer roll over the debt, forcing them to
sell about $75 billion of their assets.
The group formed by Citigroup, Bank of America and JPMorgan
will be known as the Master Liquidity Enhancement Conduit, or M-
LEC, 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, the people said. It will, at least initially, avoid
assets backed by subprime mortgages, 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.''

Shrinking Market

The amount of asset-backed commercial paper outstanding
tumbled to $899 billion in the week ended Oct. 10, from a high
of $1.14 trillion at the end of June, according Fed figures.
The soaring cost of credit prompted central banks to
respond by injecting cash into the banking system. The European
Central Bank began adding liquidity on Aug. 9 after BNP Paribas
SA, France's biggest lender, was forced to halt withdrawals from
three of its investment funds. The Fed followed, along with
counterparts from Sydney to Oslo.
As yields on asset-backed commercial paper climbed amid the
exodus from the market, some companies found their access to
borrowing cut off. Countrywide Financial Corp., the biggest U.S.
mortgage lender, had to tap an entire $11.5 billion bank line on
Aug. 16 after being unable to fund itself with commercial paper.
``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.''
Alex Roever, a debt strategist at JPMorgan in New York who
wasn't involved in the negotiations, estimates that SIVs have at
least $320 billion in assets.
``Eighty billion is great, but it's not that big a
number,'' said Roever. ``It still leaves you with $240 billion.
That's a lot of dough. There may be enough money to pay the
senior debt holders, but it's not enough to pay off everyone
else.''

--With reporting by Kevin Carmichael and John Brinsley in
Washington. Editor: Moss (clw)

To contact the reporters on this story:
Mark Pittman in New York at +1-212-617-3767 or
mpittman@bloomberg.net;
Elizabeth Hester in New York at +1-212-617-3549 or
ehester@bloomberg.net

To contact the editors responsible for this story:
Otis Bilodeau at +1-212-617-3921 or obilodeau@bloomberg.net;
Emma Moody in New York at +1-212-617-3504 or
emoody@bloomberg.net