US Treasury working w/Banks on a $100 billion fund to buy troubled assets

U.S. Plays Role In Banks' Talks On Rescue Fund
By CARRICK MOLLENKAMP, DEBORAH SOLOMON and ROBIN SIDEL
October 15, 2007

The U.S. Treasury is playing a central role in helping banks avoid losses on mortgage securities, hosting weekend negotiations to help some of the nation's largest financial institutions set up a $100 billion fund to buy troubled assets, and sounding out investors about their support for the plan.

The proposed rescue plan, which could be announced as early as this morning, was cobbled together over the past three weeks. It reflects concern that the credit crunch that has roiled global markets since the summer might get worse and damage the broader U.S. economy.

Among the worries triggering the talks, which involve roughly 10 banks: Citigroup Inc.'s affiliates owned $80 billion in assets backed by mortgages and other securities. The world's biggest bank, by market value, held the assets off its balance sheet and was facing the prospect of either having to unload them in a disorderly fire-sale fashion or moving them onto its books.

Either scenario would have dealt a blow to financial markets and the broader economy because it would have curtailed banks' ability to make loans to consumers and corporations.

Other banks also were worried because certain bank-affiliated funds have been unable to sell short-term debt and might have to unload assets in sales that could have triggered a stampede of sellers and a drastic drop in the value of securities linked to shaky segments of the nation's mortgage market.

Some observers criticized the Treasury's role in seeking to help banks avoid a big financial hit for making bets that didn't pan out. "I have never seen Treasury play this kind of role," said John Makin, a visiting scholar with the conservative American Enterprise Institute in Washington and a principal with hedge fund Caxton Associates LLC. The banks made "riskier investments that didn't work out. They should now put it back on their balance sheet."

WSJ is subscription only but here is a link to article for those that can link:

http://online.wsj.com/article/SB119240580162658678.html?mod=hps_us_whats_news

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Banks pool billions to stem credit crisis ---From USA Today

A group of big banks led by Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) plans to announce today the creation of a fund that's likely to back $75 billion to $100 billion in mortgage and other securities to try to prevent the credit crisis from damaging the broader economy, according to two people with direct knowledge of the matter.
The banks began talks three weeks ago under the supervision of Robert Steel, the Treasury's undersecretary for domestic finance, with more than a half-dozen banks taking part. Those with knowledge of the talks weren't authorized to speak on the record in advance of today's planned announcement.

Though many details remain unresolved, the banks plan to back high-quality securities, though each bank may differ in its definition of high quality, according to those familiar with the matter. It's unclear how much money each bank would supply to the fund.

Citi, Chase and the Treasury Department declined to comment. Bank of America couldn't be reached.

Though the stock market rebounded after the Federal Reserve cut interest rates last month, many investors are still wary of debt that may have been affected by the subprime mortgage crisis. That reluctance is affecting a niche of the corporate loan market called structured investment vehicles, or SIVs. These investment pools issue short-term notes and pour money into longer-term securities with higher yields, including mortgages that are relatively safe.

Richard Bove, an analyst at Punk Ziegel, says he thinks the banks' efforts won't be enough to rescue the economy from the problems spawned by the credit squeeze.

"A program like this is absolutely going to be necessary, but ultimately it's going to be the U.S. government that's going to have to do it," Bove says. "The banks can step in to assist and probably take a moderate loss, but they can't do it alone."

Link: http://www.usatoday.com/money/industries/banking/2007-10-14-banks-credit_N.htm

usurious interest rates for starters, just so a few less people will wind up defaulting on loans. They seem to be in a situation where they could lose a little or lose a lot.

Trust Fund is one of the ideas put forward by Dems so as to end the idea that The SS holding gov bonds is holding a worthless asset.

If the GOP does do this we will have a our case for doing this with SS .