A Plan to Help Economy Stay Afloat

Investors are similarly antsy about "asset-backed commercial paper," or short-term debt backed by those very mortgages and other debt products.

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In recent years, Citigroup and other major banks have created about three-dozen "structured investment vehicles," which control more than $320 billion. They are at the center of these markets, issuing short-term debt to raise money at low interest rates, buying structured securities that pay higher interest rates and making money for their investors off the difference.

But with investors reluctant to buy this commercial paper since the markets froze in August, the structured investment vehicles have less access to funds, potentially forcing them to sell at steep losses, which could affect the financial system and provoke a broader banking crisis.

In an attempt to ease that risk, Ryan and Treasury Undersecretary Robert K. Steel called executives from a dozen major banks to Washington for a Sept. 16 meeting. The meeting was scheduled for a Sunday so that participants would have few distractions. Over nearly five hours the executives exchanged ideas on how to keep problems in the debt market from spreading more broadly.

Government officials said from the beginning that there would be no taxpayer money spent to solve the problem, participants said. The most promising idea was to create a bank-financed fund that would stand ready to buy assets from these structured investment vehicles that are of high credit quality -- meaning that packages of subprime mortgages need not apply -- but are hard to sell because of skittish markets. That, the theory goes, would lower the risk of the investment vehicles defaulting on their commercial paper, helping stabilize a range of products.

Since then talks over the fund have progressed in meetings in Washington and New York and a series of conference calls.

Paulson oversaw the effort, made several calls to push it along but was not involved in the day-to-day negotiations, a Treasury official said. The department's responsibility was not to twist arms, Ryan said.

"Our role is to help people communicate with each other and share their thoughts," Ryan said, "to help these private-sector participants work through these issues with one another and to develop ideas."

"The participation was purely voluntary," he said. "Whether someone wanted to be in a meeting, be on a call or participate in this structure when it is constituted, is up to them. That's what a market solution is all about."

An executive with one of the banks involved, speaking on condition of anonymity because the negotiations over the fund's details continue, said that the banks indeed entered the partnership voluntarily, not because of any implied threat from Treasury officials.

"There are fees to be earned off of this," the bank executive said, characterizing the new investment fund as a good deal for the participants.

"Financial market prices and panics are all about confidence at the end of the day," said Martin H. Barnes, managing editor of the Bank Credit Analyst, an investment research outfit in Montreal. "When you get big players coming together like this, the hope is that that gives everybody else confidence that it's safe to go back into the waters."

Staff writer Jeffrey H. Birnbaum contributed to this report.