Bonds News

Former US Treasury head questions bank super-fund

WASHINGTON, Oct 26 (Reuters) - Former U.S. Treasury Secretary John Snow on Friday said a proposed multibillion-dollar fund assembled by top banks to prevent a fire sale of shaky debts may cause problems by delaying inevitable losses.

“We’ve got all this paper out in the system, and my inclination is to say, let’s accelerate the price discovery process on this paper,” Snow said on CNBC Television.

“We know that when you prop things up artificially -- Japan -- we know when you prop things up artificially -- the (savings and loans) in the United States -- you get bigger adverse consequences,” said Snow, the immediate predecessor of current Treasury Secretary Henry Paulson.

Snow, now chairman of private equity firm Cerberus Capital Management, said he has not discussed the fund with Paulson.

The fund, announced this month by Citigroup C.N, Bank of America Corp BAC.N and JPMorgan Chase JPM.N, is aimed at preventing the dumping of billions of dollars of bonds linked to risky U.S. subprime mortgages and held in structured investment vehicles (SIVs).

The banks organized the fund, sometimes referred to as the “super-SIV,” or Master Liquidity Enhancement Conduit, with encouragement from the Treasury Department, which said it would be useful to ensure credit markets continue to function normally as they recover from a wave of home loan delinquencies.

Snow’s questioning of the fund echoes concerns raised last week by former Federal Reserve Chairman Alan Greenspan, who said the arrangement risked “dire consequences” by propping up a faltering asset class. Greenspan said the prices of these assets should be allowed to fail until speculative excesses are wrung out and bargain-hunters emerge.