A group of big banks led by Citigroup, JPMorgan Chase and Bank of America 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.
But because investor interest in SIVs has slackened, the vehicles could be forced to unload their mortgage-related investments. Doing so would drive down the prices of those assets and spread pain across the entire mortgage industry.
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.”
Should the rate of mortgage foreclosures rise, more people will lose their homes, leading to the deterioration of neighborhoods across a swath of the country, Bove says. He predicts that Congress will ultimately revive the Emergency Home Finance Act, which was used to bail out the mortgage industry in the 1970s.
Ultimately, the total cost to ride out the storm, Bove warns, would be more than any consortium of banks could afford.
