Big Fund to Prop Up Securities Is Scrapped
Some of the country’s biggest banks have pulled the plug on a plan backed by the Treasury Department to rescue troubled investment vehicles that were leveled by the subprime mortgage crisis.
The decision came Friday after it became clear that neither the banks nor the structured investment vehicles were willing to create a giant fund to bail out the SIVs.
The reversal is a setback for Treasury Secretary Henry M. Paulson Jr., who had urged the banks to create the so-called super SIV to keep the crisis in housing-related debt from worsening.
A separate proposal by the Bush administration to modify home loans for troubled borrowers has also met with skepticism.
“It is somewhat politically embarrassing for the administration,” said Bert Ely, a banking industry consultant. “The mortgage modification program is much more significant and will get much more media attention if it doesn’t get the results that have been promised. That discussion will put the SIV plan into ancient history.”
At the Treasury’s behest, Bank of America, Citigroup and JPMorgan Chase hammered out the SIV plan this fall in hopes of avoiding a sharp sell-off in securities owned by these vehicles. Such a fire sale might rock the already jittery credit markets.
Originally it was thought that the giant fund, called a Master Liquidity Enhancement Conduit, or M-LEC, might raise as much as $80 billion to buy assets from the SIVs. But it quickly became clear that the fund would be scaled back or scrapped. Many of the 30 or so troubled SIVs moved to solve their problems themselves, sharply reducing their holdings of asset-backed securities. Many banks, meantime, were reluctant to commit financing to the super SIV.
As recently as Tuesday, leading banks and BlackRock, which was to manage the super SIV, said they were committed to the rescue fund. During the past two days, however, bank representatives and senior Treasury Department officials began to discuss whether to abandon the plan. Mr. Paulson was briefed before they made the final decision Friday afternoon.
Still, major banks left open the possibility that the super SIV could re-emerge if necessary. “The consortium will continue to monitor market conditions and remain committed to work collaboratively on any appropriate solutions, including activation of the M-LEC, if needed,” the group said in a statement.