Ocean-going Lifeboat

15 October 2007 By Simon Nixon

The US Treasury wants banks to fund a giant conduit to bail out stricken credit vehicles. The $75bn scheme should halt forced asset sales and end the spiral of marktomarket losses, allowing the commercial paper market to reopen. That s good news particularly for the banks with big exposures.

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JP Morgan, Citigroup and Bank of America are to launch a fund that will buy assets from stricken Structured Investment Vehicles. The socalled SingleMaster Liquidity Enhanced Conduit expects to provide credit guarantees of between $75bn and $100bn, equivalent to about a third of the current total assets held by SIVs.

Many SIVs typically offbalance sheet vehicles that use shortterm commercial paper to finance longterm assetbacked securities have had trouble rolling over funding programmes since the seizure of the CP market in the summer. SIVs that are unable to raise fresh finance and that have inadequate backup guarantees have been forced to sell assets at firesale prices, triggering marktomarket losses throughout the financial markets.

The US Treasury, which has been closely involved in the creation of the SMLEC, is keen to encourage other banks to participate.

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