MercoPress. South Atlantic News Agency

US private banks set up rescue fund for sub-prime debt

Three of United States largest banks have announced a plan to buy up billions of dollars of troubled investments that lost value in the global credit crunch. The unusual move aims to boost confidence in the market for short-term and sub-prime debt, preventing a further sell-off of such investments.

The fund, facilitated by the US Treasury, was announced by Citigroup, Bank of America and JP Morgan. The size of the fund was not disclosed, but reports put it at about 80 billion US dollars. The fund is an effort to unblock credit after a squeeze prompted lenders to scale back many types of lending. Analysts say the big US banks hope their move will deter the current holders of sub-prime mortgage securities from dumping them on the market at knockdown prices. The fund should help restore normal credit conditions for mortgage securities, but also for short-term corporate loans that many firms need to meet payroll and day-to-day expenses. In a short statement the US Treasury Department supported the initiative saying it was pleased "with the response by the private sector to enhance liquidity in the short term credit markets. 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. This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets. "The Department appreciates this global consortium's cooperation during the last several weeks and their leadership in developing a market-based response to this situation. Such efforts help to foster orderly capital markets." Citigroup said it suffered losses of more than 3 billon US dollars from writing down securities backed by underperforming mortgages and loans tied to corporate buyouts. Reports said that British banks HSBC and Barclays were involved in the move, but HSBC said it had not participated in the talks and there were currently no plans for a similar fund in Europe. The Financial Services Authority, the UK finance watchdog, said that it would be supportive of any UK bank that participated in the fund. The US banks said other global banks and brokerages would participate in the plan, but did not disclose any other company names. The discussions are similar to those conducted in 1998 to help organise the bailout of hedge fund Long Term Capital Management. Higher US mortgage rates have sparked record home loan defaults among people who have poor credit histories. These defaults have hit financial markets worldwide, because the sub-prime mortgages had been packaged up and sold to financial institutions around the world. This has caused a wider credit squeeze, as banks and other investors have been less willing to lend to each other while it is unclear where the bad debts lie in the system