Banks to create fund to head off asset sale

Citigroup, Bank of America and other banks have met with the Department of the Treasury, aiming to create a fund that would prevent a massive asset fire sale, and would stimulate the credit markets. During the weekend, the Treasury Department hosted talks to help the banks set up a $100 billion fund that would purchase troubled securities in exchange for short-term debt, according to published reports. The new fund created by the banks will be called the Master-Liquidity Enhancement Conduit, and the details are still being worked out. “The joint efforts of domestic and international financial institutions, broker dealers, and investors have resulted in a potential structure to improve liquidity in the asset backed commercial paper markets,” the department said in a statement. The banks expect to have the fund running in 90 days. Even though the markets overall have calmed since the Federal Reserve lowered interest rates in September, structured investment vehicles — credit arbitrage funds that invest in asset-backed securities — have not recovered. The investment vehicles are funded with commercial paper, which is backed by home loans and credit card debt. Investors, suspicious of the quality of these debts, have stayed away from SIVs, raising concerns that the vehicles will sell off billions in assets and pressure prices. The fund aims to keep this from happening.