A Plan to Help Economy Stay Afloat
Aided by Treasury, Banks Create Safety Net
Tuesday, October 16, 2007; Page D01
The Treasury Department, in a move with little historical precedent, pushed leading U.S. banks to create a fund to buy up assets in a troubled segment of the credit market.
Citigroup, J.P. Morgan Chase, and Bank of America announced the fund yesterday, saying it would be used to prevent problems in certain exotic forms of debt from worsening and threatening the entire financial system. It could be a safety net of $80 billion or more.
The fund grew out of conversations initiated by senior Treasury Department officials, making for an unusual intervention by the government into the workings of financial markets. Treasury officials yesterday described their role as "facilitators" who merely ensured that private entities from various parts of the financial world communicated with one another and came together to act in their mutual interest.
Not even the Treasury official most closely involved with the effort could point to an example of the department previously taking such a role. "I can't think of a specific analogy," said Anthony Ryan, assistant secretary for financial markets.
Analysts noted similarities to the 1998 financial crisis around the hedge fund Long Term Capital Management. To prevent the failure of that fund from cascading through the financial system, the Federal Reserve Bank of New York persuaded a group of 15 investment firms to buy up its assets. That $3.6 billion intervention was much smaller than the new fund, although that episode was widely viewed as a much greater threat to the financial system than the current one.
Adam Lerrick, visiting scholar at the American Enterprise Institute, made a different comparison -- to early 20th-century financier J.P. Morgan, who helped prevent the banking panic of 1907 from becoming more severe by cajoling bankers to help one another avoid a liquidity crisis.
About half the money in the fund announced yesterday -- formally called the Master Liquidity Enhancement Conduit -- will come from the three major banks that announced it. The rest will probably come from about a dozen other banks. The participants, and the amount each will commit, are still being negotiated. The investors in the fund expect to earn fee income off of the enterprise.
Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said that he was pleased that no public money would be involved and that he wanted to know more about the Treasury Department's role. "It's a pretty significant intervention on the part of financial regulators," he said.
Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, praised the Treasury Department's actions.
Others see the department's role as setting a risky precedent. "This is a bailout," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "Treasury has insisted it made no financial commitment, but I would like a statement from [Treasury Secretary Henry] Paulson that if the banks lose a ton of money on this that the government won't come to the rescue."
Since markets for a variety of financial products entered a period of upheaval in August, Treasury officials have been monitoring the situation. Markets for large mortgages, corporate debt and most other financial products have stabilized since then.
But one major exception is the market for "structured" securities, which are packages of home mortgages, credit card receivables and other debt that have been sliced into combinations and resold to institutional investors. Because of the complexity of these securities, buyers aren't sure how to value them, though most are little affected by the problems with high-risk mortgages.