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), Bank of America (BAC.N) and JPMorgan Chase & Co (JPM.N) are setting up the pool, which could be about $80 billion. Wachovia Corp WB.N 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.

SIVs, which controlled some $370 billion as of September 14, generally finance their asset purchases with commercial paper and medium-term debt.

These funds make money by earning more from their investments than they pay to fund them.

But selling commercial paper has grown increasingly difficult as investors in the market became jittery. If SIVs cannot refinance maturing commercial paper, they typically have some backup lines of credit to draw on, but they may also have to sell off assets.

The new pool will probably have a complete backup line of credit from multiple banks, according to an investor who has spoken to those involved in the deal and has requested anonymity.

Any backup lines may help the new pool sell commercial paper, but it may buy the highest-quality assets and leave the SIVs with the weaker ones.

As a result, the SIVs' funding troubles could end up being even more acute, said State Street's Cunningham.

Another potential problem is that managing a SIV requires skill and discipline, said Janet Tavakoli, a structured finance consultant.