Tuesday, October 23, 2007

The Fed Lends Its Support for MLEC (Citibank Bail-Out Fund)

Not exactly what I would call a “ringing endorsement”, but the Fed has indicated that it is supporting MLEC. It appears that the Fed is willing to support most “private-sector” proposals to help improve the liquidity of SIV market. Text in bold is my emphasis. From Bloomberg:

The Federal Reserve indicated it supports the plan brokered by Treasury Secretary Henry Paulson to increase liquidity in the market for asset-backed commercial paper.

The agreement reached by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. is well-enough designed that it may help credit markets, a Fed official, who declined to be identified, said late yesterday in Washington. The plan also may help investors establish prices for complex securities that funds purchased with the proceeds of commercial-paper sales, the official said.

The Fed's endorsement comes as some banks, analysts and international officials question whether the planned $80 billion fund will help. Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday that it is ``premature to make a firm judgment'' because details of the plan haven't been established.

Fed officials' silence since the agreement was announced Oct. 15 has been misinterpreted as criticism, the Fed official said.

Central bank policy makers have lowered their benchmark interest rate by half a percentage point and the charge for direct loans to banks by 1 percentage point since access to credit slumped in April. The New York Fed has also injected reserves into money markets to help provide liquidity.

The three biggest U.S. banks said last week that they would raise money for a fund that would buy assets from distressed structured-investment vehicles. Banks and hedge funds set up the SIVs to issue short-term debt and invest in longer-term assets such as bank loans and mortgage-backed securities.

Investor uncertainty about the value of complex assets held by the vehicles has damped willingness to lend to the funds in the commercial paper market, stoking concern they'll have to dump holdings at fire-sale prices. Two European-based SIVs, Cheyne Finance Plc and Rhinebridge Plc, defaulted on more than $7 billion last week.

Paulson kick-started the talks by having his top domestic finance official, Undersecretary Robert Steel, host meetings of bank executives at the Treasury in September. The Treasury chief told reporters on Oct. 19 that the department played ``a facilitating role.''

Both Paulson and Steel were able to draw on decades of experience in capital markets, as both are veterans of Goldman Sachs Group Inc. Paulson said he expected the fund to be set up by the end of the year.

Ackermann said yesterday that the plan would have to provide ``transparency'' to the prices of financial assets to succeed in restoring investor confidence. He spoke in Washington on behalf of the 31-member board of the Institute of International Finance, an industry association that represents the world's largest financial companies.

Some foreign officials have also expressed doubts. Mario Draghi, governor of the Bank of Italy, told reporters on Oct. 19 that ``there is still a lot of work to do before the fund works correctly.''
Treasury Assistant Secretary David Nason conceded as much yesterday, saying at a Washington conference that ``there are some details that will need to be worked on in the next few weeks. There is still work to be done.''

At the same event, Fed Governor Randall Kroszner said ``I have very much encouraged private-sector proposals,'' without commenting specifically on the SIV plan. ``I look forward to seeing how this'' evolves, he said.

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