From today’s New York Times:
Three of the nation’s largest banks, working together at the behest of the Treasury Department, announced this morning that they were creating a large fund to serve as a buyer of bonds and other debt at a time when many investors are avoiding them.
Citigroup, Bank of America and JPMorgan Chase will create a fund, called a conduit, that will be able to buy around $75 billion to $100 billion in highly rated bonds and other debt from structured investment vehicles, or SIVs. Those vehicles own mortgage-backed bonds and other securities and have had trouble obtaining financing since early August, when the credit markets froze up.
It is interesting to note that these funds are not that different from funds maintained by J.P. Morgan for similar purposes in earlier times.
To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings â€” AAA and AA â€” and debt that is backed by other mortgages, credit card receipts and other assets.
Each bank will put up an unspecified amount of its own capital into the fund, and other banks from around the world are expected to join the consortium in the coming weeks. The conduit will raise most of its money by selling commercial paper, which is a form of short-term debt like Treasury bills but is issued by banks, corporations and investment vehicles.
The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.
Read the full article here.