Banks set up fund to bail out investment vehicles

By Dan Wilchins

NEW YORK (Reuters) - The three biggest U.S. banks including Citigroup and Bank of America Corp said on Monday they plan to create a fund to prevent the sell-off of billions of dollars of bonds linked to subprime mortgages and other debt.

The banks' pool, which a source said could be around $80 billion, is meant to stave off the risk that certain investment funds would have to dump assets at fire sale prices.

Such forced sales could push debt prices lower, magnify bank losses from the credit crunch, and make lenders even more reluctant to extend new loans. Tighter credit could jeopardize economic growth.

Treasury officials helped organize discussions to create the pool beginning last month, as trouble in short-term debt markets that first arose in August persisted. But taxpayer money is not seeding the fund.

Particulars of the pool are still being worked out, and analysts cautioned the deal could be difficult to set up.

Some critics of the fund say banks are bailing out players that made bad business decisions when setting up funds known as structured investment vehicles, or SIVs.

Citi's SIVs held some $100 billion in assets at the end of August, making the bank the largest sponsor of the vehicles in the world, while JPMorgan Chase and Bank of America have had little involvement with SIVs.

"All banks are doing is rolling over their problems into a new vehicle," said Josh Rosner, a research analyst at Graham Fisher in New York.

JPMorgan Chase and Bank of America will receive fees for participating in the pool.

Other investors said that the pool could help stabilize credit markets, most notably the market for short-term bonds known as commercial paper, where borrowing costs are still relatively high.

"I truly believe that companies should have to suffer from their bad business decisions, but the whole market could suffer if nothing were done," said Michael Holland, principal at Holland & Co, which oversees more than $3 billion of investments.

Regulators can ensure that players that made bad business decisions are reined in appropriately, Holland added.

U.S. Treasury Secretary Hank Paulson said regulators did not fully understand the funds, known as structured investment vehicles, which is an issue that must be addressed.

HSBC, one of the largest SIV sponsors, is considering joining the pool, a source said. HSBC declined to comment.

GARBAGE?