Largest Banks Create SIV Backup Fund

Several of the world’s biggest banks are putting together a backup fund whose proceeds would be used to buy risky mortgage securities, according to several news reports. The fund, whose assets are estimated to be between $75 billion and $100 billion, could be up and running within 90 days, and is being set up at the urging of the U.S. Treasury. The idea is to convince wary investors to flow more money into the beleaguered credit market, and strengthen troubled structured investment vehicles (SIVs). As of August, SIVs have held about $400 billion in assets, but have recently struggled to refinance their debt. The backup fund would issue short-term notes to bankroll the purchase of assets held by SIVs associated with the banks. As investors have stopped buying SIV-backed commercial paper some analysts are concerned that the roughly 30 SIVs will simultaneously dump billions of dollars worth of mortgage-related assets, sending negative ripples across the broader credit market. Critics argue that the move is nothing more than a bailout for banks that made bad bets, echoing the 1998 bailout of hedge fund Long Term Capital Management. About 10 banks, including JPMorgan Chase, Citigroup and Bank of America, began meeting three weeks ago in talks organized by Henry M. Paulson, the Treasury secretary. A framework for the plan could be announced this week, according to the reports, with another set of meetings scheduled for this weekend.