New superfund to save the day

Real Estate Weekly,  Oct 17, 2007  by Daniel Geiger

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A group of major financial institutions announced Monday that they will team up to create a massive fund that will invest in asset backed securities and other types of securitized debt during times when other bond buyers won't in order to preserve liquidity in the capital markets.

The fund, spearheaded by a consortium led by Bank of America, Citigroup and JPMorgan Chase, will only buy highly rated bonds and was created to address the problems in the securitized debt market that emerged during the summer, when bad subprime loans started a market-wide panic over the risk behind all types of asset back securities.

The new fund will be a repository for between $75 to $100 billion of debt and will essentially allow lenders to continue issuing loans during difficult market conditions by acting as a buyer for the debt.

In August, the securitized debt market had virtually ground to a halt, allowing hundreds of billions of dollars worth of loans to collect on the balance sheets of lenders. The slowdown caused lenders to virtually stop making all but the most conservative loans. The super conduit would act as a buyer during such periods of market disruption, supplementing the market with liquidity.

Treasury officials were eager for this type of fund because the credit crunch had been chief among a number of troubling factors that had seemed to push the economy close to a recession.

The debt crisis was tied to the health of the economy because corporations depend on the securitized debt markets for much of their capital needs. Financial institutions--including the ones in the consortium--have had to slash prices for much of the securitized debt that they originated to begin clearing the backlog.

On Monday, Citigroup, one of the members of the consortium, announced that its third quarter profits had dropped 57% because of such write offs. Merrill Lynch and UBS also announced recent such losses as well.

Going forward, the fund would be able to buffer financial companies from these types of write-offs because it would be able to buy the debt. It is unclear how the fund would price the bonds during periods of illiquidity.

COPYRIGHT 2007 Hagedorn Publication
COPYRIGHT 2008 Gale, Cengage Learning