Bankers wary of investment fund rescue effort

By Thomas Atkins and John Poirier

WASHINGTON (Reuters) - Bankers remain wary of plans to launch a massive investment rescue fund to soften the blow of the U.S. subprime meltdown, saying it could interfere with a market recovery and stall a resolution to the credit crisis.

Carl Stalberg, executive chairman of Swedbank (SWEDa.ST), said on Saturday he doubted the fund would be an effective way for banks to liquidate billions of dollars in structured debt in markets where buyers have effectively gone on strike.

"It might be better to let the markets work it out. Trading platforms like that are always a difficult task," Stalberg told Reuters on the sidelines of a banking conference.

Stalberg spoke one day after a meeting of finance officials from the Group of Seven rich nations where U.S. Treasury Secretary Henry Paulson lobbied in support of the plan, which aims to restore confidence in the financial sector.

Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) announced on Monday plans to create the multibillion dollar fund, which was hatched with the U.S. Treasury's blessing.

The fund is intended to prevent bank-affiliated Structured Investment Vehicles, or SIVs, from dumping billions of dollars of bonds linked to subprime mortgages and other debt back into financial markets.

But despite the U.S. government's active role in seeking support for the plan, many bankers and investors remain cautious -- with some saying they have nothing to gain by participating.

"Markets are rather suspicious about that policy. It could interfere with the market mechanism and introduce biases," said Olivier Garnier, deputy general manager at Societe Generale Asset Management.

The scope of the losses won't be clear until buyers regain confidence, he said, and then the holders of the assets will likely have to face up to losses.

"Once liquidity returns and impaired assets can be marked to market, some investors or financial institutions will see the true losses and will be forced to sell and deleverage further," Garnier said.

TO FLY

Nor has the regulatory community unanimously endorsed the idea, with Britain's financial watchdog saying it was up to banks themselves to decide whether to participate.

"It will either fly or it won't fly. We watch it with interest and we will see what will happen," said Callum McCarthy, chairman of Britain's Financial Services Authority.

Perhaps the sharpest indictment came from Alan Greenspan, the former chairman of the U.S. Federal Reserve, who said the fund may hurt more than help. Greenspan told Emerging Markets magazine the fund runs the risk of further undermining already brittle confidence in besieged markets.

Bank of Canada Governor David Dodge, in contrast, offered a vote of confidence, calling the scheme a "very sensible idea" that could buy time and prevent a potentially destabilizing dumping of assets.