Property Grunt

Saturday, October 13, 2007


This is from the NYT

October 14, 2007
Banks May Pool Billions to Avert Securities Sell-off
Several of the world’s biggest banks are in talks to put up about $75 billion in backup financing that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that still looms over the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as tomorrow, according to people with knowledge of the discussions, but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it still possible that the parties will not reach agreement.

The proposal recalls the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. But it also shows the heightened concerns of both government and financial players that problems in a crucial part of the credit market have not stabilized, even after a half-point drop in interest rates, and threaten to derail the overall economy.

Senior executives from each of the banks have attended meetings in Washington and New York hosted by Robert Steel, the Treasury undersecretary for domestic finance and a former Goldman Sachs banker who is a close adviser to the Treasury secretary, Henry M. Paulson.

The group has also sought input from others. Several big international banks, including Barclays and HSBC, have been asked about their interest in participating. The group has also reached out to several of the major structured investment vehicles, as well as big institutional investors in the money markets, like Fidelity. The Federal Reserve has been aware of the talks but has not been playing an active role in the discussions.

The effort to create a backup fund began at the behest of Mr. Paulson. The freeze in markets for commercial paper had shown very limited signs of thawing, but Wall Street firms were having almost no luck finding buyers for mortgage-backed securities and derivatives.

Mr. Paulson called a meeting that included the chief executives of Citigroup, Bank of America and other big banks to see what could be done to relieve the bottleneck. The meetings that followed — in Washington, New York and on conference calls — were led primarily by Mr. Steel and by Anthony Ryan, a former investment banker who is now assistant Treasury secretary for financial markets.

Officials at the New York Fed and the Federal Reserve Board in Washington said they had stayed out of the discussions. But Fed officials have been tracking the credit markets closely, and have said the market for structured investment vehicles remains largely frozen.

The investment vehicles, which are pools of assets backed by mortgages, credit card debt and other loans, are often organized by banks but are not actually owned or held by them. The investment vehicles are supposed to be financed through the issuance of commercial paper, but there have been few takers for securities tainted by mortgages.

The most acute problems are for structured investment vehicles that do not have backup lines of credit with a sponsoring bank. Until recently, that seemed safe enough for investors, because the securities were backed by what appeared to be solid collateral. But the panic over bad mortgages has decimated the market value of such securities and made them impossible to sell.

To be sure, banks have been buying back a great deal of commercial paper in recent weeks, even in cases where they are not legally obliged to do so. But that is tying up bank capital and could lead to a credit crunch in other areas.

Edmund L. Andrews contributed reporting.

When this many big time players converge to put together a pot this big to resolve this crisis, you know that they have been going through copious amounts of dry underwear.

The Mortgage, like any other form of debt, is passed around in the markets. As soon that house is bought and sold that mortgage is bundled up with a bunch of other mortgages and sold off to another buyer. And then begins the circle of life.

Like a doobie at a frat party, that mortgage is passed around. But when people start freaking out when it turns out their doobage is laced with PCP, then everyone lays off the bowl.

As I have stated before in a previous entry, any investment vehicle or product that has connections to mortgages has become verboten in Wall Street so it appears these parties are facing an uphill battle.

Will this help? Or will it make things worse? Do they have the liquidity to pull this off? Who benefits if the fund comes together and who benefits if it doesn't?

Anyone care to answer?