Banks' plan for big fund faces big hurdles

By Dan Wilchins - Analysis

NEW YORK (Reuters) - A plan by top U.S. banks to set up a fund preventing the forced sale of billions of dollars of hard-to-value securities faces some serious obstacles.

The nation's three largest banks said on Monday that they were setting up a pool to prevent certain investment funds from having to sell off assets. Any forced selling could set off a chain reaction, ultimately slowing economic growth in the United States and Europe.

The banks' new pool is meant to bail out funds known as structured investment vehicles, which have invested in assets linked to subprime mortgages and other debt.

But analysts said the pool might end up hurting existing SIVs even more by stripping them of their best assets. Nor is it clear who would manage the new pool.

"It's all a bit of a shell game," said Bill Cunningham, head of global fixed income research State Street Global Markets in Boston.

Details of the new pool, known as the master liquidity enhancement conduit, or M-LEC, are still being worked out.

Citigroup (C.N: Quote, Profile, Research, Stock Buzz), Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) are setting up the pool, which could be about $80 billion. Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) said on Wednesday that it was also participating.

The M-LEC will buy high-quality assets from existing SIVs and finance itself in part by issuing short-term debt known as commercial paper.