November 19, 2007

Level 3 assets and the SIV backup fund

Two weeks ago we talked a little about the next part of the meltdown in the credit markets, what will soon be the furor over level three assets. Now comes word that the nations big banks and investment houses have structured a fund that might actually help alleviate the problem. By creating a buyer of last resort in an illiquid market...

Officials from Bank of America, Citigroup and JPMorgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed, said this person, granted anonymity because he was not authorized to talk for the group.

Bank participants, money market investors and even some managers of the troubled investment vehicles that would benefit most had considered previous versions of the fund to be infeasible, casting doubt over a final plan. Discussions had been taking place since early fall, when the Treasury Department convened a meeting.

Now, the proposed fund could begin operating by the end of December, this person said. The banks could begin asking roughly 60 financial institutions to contribute to the fund by Friday or early next week.

Of course, this is kind of a backdoor way for the banks to take some pressure off their balance sheets from all the level 3 assets they've been forced to salt away. Look at it this way... you have a bunch of assets you can't sell because no one wants them. So, you create a company that will buy certain of those assets, creating a market value for them. It's self dealing, analogous to what our good friends at Enron did. However, unlike Enron, this is real capital the banks are having to cough up out of their equity. Frankly, it has to work or many of our largest banks are going to have to access their lender of last resort, the Federal Reserve, to remain solvent.

Which is a nice way of saying US taxpayers.

Posted by mcblogger at November 19, 2007 12:44 PM

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