Banks reported agreed on credit backup fund

By Eric Dash
The New York Times
Sunday, November 11, 2007

http://www.nytimes.com/2007/11/11/business/11bank.html?ref=business

The country's three biggest banks have reached agreement on the structure of a backup fund of at least $75 billion to help stabilize credit markets, a person involved in the discussions said yesterday, ending nearly two months of complicated negotiations against a worsening economic backdrop.

Officials from Bank of America, Citigroup, and JPMorgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed, said this person, granted anonymity because he was not authorized to talk for the group.

Bank participants, money market investors, and even some managers of the troubled investment vehicles that would benefit most had considered previous versions of the fund to be infeasible, casting doubt over a final plan. Discussions had been taking place since early fall, when the Treasury Department convened a meeting.

Now the proposed fund could begin operating by the end of December, this person said. The banks could begin asking roughly 60 financial institutions to contribute to the fund by Friday or early next week.

"We cleared all the big hurdles," this person said. "We agreed to a much simpler structure that we think can get done rather than optimize it for everyone."

Officials from the banks and the Treasury Department declined to comment or did not return calls.

The new fund's potential impact is unclear. Debt market conditions are rapidly deteriorating, leading some analysts to declare them worse than nearly a decade ago, when the Long-Term Capital Management hedge fund collapsed. Investors' appetite for pools of assets -- from mortgages to auto and credit card loans, more recently -- has all but dried up. And virtually all structured investment vehicles, commonly called SIVs, are trying to unload the securities they hold, on the assumption that the proposed backup fund will not work.

Now, Henry M. Paulson Jr., the Treasury secretary, is describing the proposal's benefits as helping "at the margin." In an interview on Thursday, before the latest agreement was made, he acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.

"This is something that is not a savior," Mr. Paulson said, noting that he expected the fund to begin operating by the end of the year. "Anything at the margin that will speed up liquidity is worth trying."

The fund's organizers say it is intended to avoid a severe credit market disruption. The hope is that it will allow time for asset prices to recover, although most market analysts call that improbable. More likely, it will discourage SIVs from dumping their holdings all at once, causing securities prices to plummet.

The proposed fund could help thaw the frozen market for asset-backed securities by establishing a ready buyer, even if no SIV uses it. SIVs are currently struggling to find buyers for their assets; no investor wants to be the first one into the market, only to watch prices drop even more a few hours or days later. "We are hoping that this will grease the wheels a little bit to start more trading," the person involved in the discussions said.

The agreement reached Friday makes several changes that simplify earlier proposals. SIVs will no longer have to get the approval of at least 75 percent of their investors if they want to participate in the backup fund. And the backup fund will not distinguish between the assets it buys from each SIV; instead, it will assign the same risk level to all their troubled securities.

Of course, participants have been overly optimistic about their previous efforts, only to see them struggle to take flight. The backup fund still needs the blessing of the major credit rating agencies. A fee structure from 75 to 100 basis points, higher than initially proposed, is also being worked out. And several crucial tax, legal and regulatory issues await approval.

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