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As governments shower money on them, banks drop subprime rescue fund
Banks Abandon Super-SIV Plan
By David Enrich and Diya Gullapalli
The Wall Street Journal
Friday, December 21, 2007
The banks orchestrating a bailout of troubled investment vehicles that were hit by the subprime mortgage crisis are throwing in the towel after struggling to raise money for the planned fund, according to people familiar with the matter.
At the behest of the Treasury Department, Bank of America Corp., Citigroup Inc., and J.P. Morgan Chase & Co. have been working since September to set up the fund, which would buy assets from so-called structured investment vehicles. SIVs have been battered by the credit crunch, with investors refusing to buy the short-term commercial paper that the funds' issue to buy higher-yielding assets, in particular securities backed by subprime mortgages.
Lack of interest has led the banks to drop the plan -- known as the Master-Enhanced Liquidity Conduit, or M-LEC. In many cases the banks, in particular Citigroup, that were supposed to sell assets to the fund have instead bitten the bullet and moved the assets onto their own balance sheets, alleviating a key rationale for the rescue fund.
Despite the fundraising difficulties and the reduced need for the bailout, the three banks and BlackRock Inc., which was selected to oversee and operate the fund, have insisted until recently that it was still on track, albeit in a smaller version. Tuesday, the parties said in a joint statement that "We are committed to our goal to launch M-LEC in the weeks ahead with its ultimate size at closing being driven by SIVs' needs and evolving market circumstances."
The banks and BlackRock are likely to issue a statement by Monday saying they no longer intend to go forward with the fund, according to the people familiar with the matter. But these people say that if conditions worsen, the banks could reactivate the fund in the future.
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