Fear not, a consortium of bankers is going to rescue the market

This is just surreal. When I saw the story on the news this morning,
the first thing that popped into my mind was, "didn't the EXACT same
thing happen in 1929?" I mean, even some of the participants are the
same.

Sheesh.


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http://biz.yahoo.com/ap/071015/banks_credit.html

3 Largest Banks Team on Rescue Fund
Monday October 15, 8:11 pm ET
By Joe Bel Bruno, AP Business Writer
Nation's Three Largest Banks Team to Create a Rescue Fund of Sorts


NEW YORK (AP) -- The nation's three largest banks said Monday they are
teaming up to create a rescue fund of sorts -- potentially as large as
$100 billion -- to help bail out troubled global credit markets.

Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., at
the prodding of the Treasury Department, will buy distressed debt from
markets roiled during the summer's financial crisis. The joint effort
is the result of more than a month of talks mediated by the
government.

The plan is designed to inject more confidence into the market and
increase investor appetite for the short-term debt known as commercial
paper. The market for commercial paper, which is crucial for companies
to fund short-term borrowing needs and which has historically been
considered very safe, locked up this summer.

That followed a crisis in the mortgage industry, as people defaulted
on their home loans at a skyrocketing rate. It caused a widespread
aversion to risk and led the Federal Reserve to pump money into the
financial system, though the latest plan relies more heavily on the
banks themselves.

It was not known how much money would be put into the fund, but there
have been reports it could be between $80 billion to $100 billion.
Each bank will put up an unspecified amount of its own capital into
the fund.

"The problem is festering and I think they are trying to get ahead of
it," said Professor Scott Stewart of the Boston University School of
Management. "This is exactly what they should be doing -- accepting
responsibility instead of asking the government to bail them out."

Treasury Secretary Henry Paulson, who met personally with chief
executives from all three banks, said he's pleased with the plan and
"that it will have real benefits to the marketplace."

The government's role in coming up with a private-sector solution to
the nation's credit problems is similar to the bailout of hedge fund
Long-Term Capital Management in 1998. The Fed approached Wall Street's
biggest banks to rescue LTCM before its wrong-way financial bets set
off a financial shockwave.

This time around, the banks hope to not only prevent credit problems
from spreading, but also to bail themselves out. Many banks operate
structured investment vehicles, known as SIVs, that collectively are
said to have as much as $400 billion worth of assets. Those assets
could plunge in value and set off a worldwide fire sale unless the
credit markets are stabilized.

The SIVs used short-term commercial paper, sold at low interest rates,
to buy longer-term mortgage-backed securities and other instruments
with higher rates of return. With the seizure in the credit markets,
many SIVs had trouble selling new commercial paper to replace upcoming
obligations on older paper.

The new bailout fund -- called the Master Liquidity Enhancement
Conduit or M-LEC -- would launch in the next 90 days and be used to
buy distressed securities from SIVs. That would in turn give them the
capital to pay off their commercial paper obligations, and ultimately
extricate themselves from what otherwise might have been substantial
losses.

By buying SIVs' distressed investments, the new fund would inject
enough liquidity into the market to make investors more confident in
buying commercial paper. The funds' backers said they will shy away
from risky instruments and buy only highly rated asset-backed debt --
a market that is already beginning to show signs of life.

JPMorgan Chase and BofA do not operate SIVs, but will put money into
the fund because they'll earn fees for helping arrange transactions.
However, Citigroup has about $100 billion tied into SIV investments,
and took the lead during discussions with the government.

Citigroup Chief Financial Officer Gary Crittenden said Monday the plan
"could provide reassurance to the market and make the funding of very
high-quality assets a little easier."

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