Banks Drop Plan Aimed At Easing Credit Crunch

These moves came at a considerable cost to shareholders of these banks, but they also helped bring a measure of stability to the market for short-term debt.

At the time the plan was crafted, it was the Treasury's most extensive action to address the credit crunch that has plagued financial markets since the summer.

Paulson called together leaders of major banks in September and persuaded the institutions, normally brutal competitors, to come together to set up the fund, known as the master-liquidity enhancement conduit.

The fund would have only bought complex securities with the best credit ratings, but that was not enough to attract interest from potential financial backers.

In addition to companies that depend on short-term loans, a wide range of institutions would have benefited from the fund, including money-market mutual funds, pensions, university endowments and hedge funds. But few would support the plan publicly because that would have been tacitly admitting they owned these troubled securities backed by mortgages and sparked concern among their investors.

As recently as Monday, Paulson said he still saw a need for the fund to be created, despite the decision by banks to absorb SIV losses onto their balance sheets.

"I think it's another market-driven response that is a positive," he said of the plan in an interview. "It is about orderly markets."

Paulson praised the decision of Citigroup and other major banks to put the SIVs on their balance sheets but said that many SIVs remain troubled. He was optimistic Monday, saying the fund would be created soon, a view echoed the next day by the institutions involved.

After the announcement yesterday that the fund was not going forward, Treasury spokeswoman Jennifer Zuccarelli said: "The department appreciates the efforts of the financial professionals who brought the conduit together in such a short period of time." She said the fund had been "designed to complement other market solutions."