Banks Create Fund to Help to Fight Woeful Credit Market

From staff reports

Three of the United States' biggest banks - Citigroup Inc. (C), Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM)- announced yesterday (Monday) that they agreed to start a fund to enhance the liquidity of asset backed commercial paper (ABCP) and medium-term notes by structured investment vehicles (SIVs).

The new fund - technically known as a "master liquidity enhancement conduit," or M-LEC - will purchase highly rated assets from existing SIVs that choose to take advantage of this source of liquidity. The banks said they are still determining the capital structure, underlying cushion and size of the fund, though Bloomberg reported that insiders say it is about $80 billion.

"Access to such liquidity is intended to allow participating sellers to meet pending redemptions and facilitate asset-backed commercial paper rollovers," the banks said in a statement.

The fund could be up and running within 90 days, and other banks and investment management firms have expressed support for the plan, the banks report. [For a full analysis of the long-term impact this fund is expected to have, as well as a recommendation on the single stock to buy in order to profit, please click here.]

"Recently, refinancing in the asset-backed commercial paper markets has been difficult despite the high-quality collateral underlying many of these securities. The objective of M-LEC is to facilitate these re-financings and to complement other market-based solutions in supporting an orderly and efficient market environment," the statement said.

Bloomberg quoted U.S. Treasury Secretary Henry Paulson praising the plan, saying it will help shore up the U.S. economy. 

"In the shorter term, I applaud a private-sector initiative to speed up liquidity in the asset-backed paper market," Paulson said. "That can only be good for the capital markets, that can only be good for what's going on in the mortgage markets today, and can only be helpful to the economy if this works as the people leading this hope it will work."

However, Wall Street didn't respond so kindly, as the fund's announcement was partly blamed for the Dow Jones' drop of more than 100 points. And it didn't help the one of the three backing companies, Citigroup, announced yesterday that third-quarter profits fell 57%.

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