Bold bank plan hatched at casual Treasury meeting

By Patrick Rucker

WASHINGTON (Reuters) - The ambitious multibillion dollar fund that Wall Street hopes will shore up creaking credit markets was hatched at an unlikely weekend meeting last month at the U.S. Treasury Department.

During that Sunday gathering, where bankers wore open collars and lunched on an order of take out sandwiches, two senior Treasury officials prodded Wall Street executives to imagine how order might be restored in markets rattled by a wave of failing mortgage loans, according to someone familiar with the meeting.

In the weeks before the meeting on September 16, securities packed with mortgages sank in value as the home loans that propped them up began to fail. Investors who stoked the recent housing boom with easy credit had turned their back on mortgages, sparking a broader pullback that rattled financial markets around the globe.

If those assets continued to nosedive, many banks could face big losses that could further constrict lending, potentially harming the economy.

The prospect of financial markets seizing up with a lack of credit prompted the Treasury Department to summon Citigroup (C.N), JPMorgan Chase & Co. (JPM.N), Bank of America Corp. (BAC.N) and several others for the meeting.

The encounter was chaired by two top Treasury officials, both of whom worked in the financial industry before joining government: Robert Steel, the under secretary for domestic finance, and Anthony Ryan, the assistant secretary for financial markets.

With about thirty people gathered in a Treasury Department conference room, Ryan and Steel facilitated a four-hour-plus brainstorming session where bankers aired a handful of ideas.

One proposal that stuck was that banks would chip in and create a new fund to serve as a way station for shaky securities. Over the next few weeks, at meetings both in Washington and on Wall Street, Treasury officials worked with banks to hammer out details of the plan.

While Treasury made clear that it would not have a stake in the project, officials felt that they were uniquely able to midwife the new fund. And while Ryan and Steel were the public face of effort, Treasury Secretary Henry Paulson had given such an initiative his blessing before the mid-September meeting.