Greenspan says new bank fund may hurt markets

WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan said in an interview published on Friday that a multibillion-dollar fund that top banks are assembling to settle jittery financial markets may actually hurt rather than help.

Greenspan said the fund, which was announced last week, runs the risk of further undermining already brittle confidence in besieged markets and could have what the publication termed “dire repercussions”, according to an interview with Emerging Markets magazine.

This bank-led “super fund,” called Master Liquidity Enhancement Conduit (MLEC), differs from the coordinated industry effort to bail out Long Term Capital Management when the hedge fund collapsed in 1998, Greenspan said.

In the case of LTCM, the move was aimed to prevent a widespread asset sell-off and a major market disruption. On the other hand, the “super fund” is geared to support a faltering asset class - mainly securities backed by subprime mortgages, according to Greenspan.

“They’re not talking about going in and absorbing sub-prime mortgage asset-backed (securities). They’re talking about essentially increasing the liquidity of those who have the SIVs (structured investment vehicles) and the like,” Greenspan said in the interview.

The fund, announced last week by Citigroup C.N, Bank of America Corp BAC.N and JPMorgan Chase JPM.N, is intended to prevent the dumping of billions of dollars of bonds linked to U.S. subprime mortgages and other debt that are held in SIVs.

Rather than a “super fund” to prop up prices of distressed securities, Greenspan argued that the prices of these assets should be allowed to fall until speculative excesses are wrung out and bargain-hunters emerge.

“If you intervene in the system, the vultures stay away,” he said. “The vultures sometimes are very useful.”

Emerging Markets is published in conjunction with the semiannual meetings of the International Monetary Fund and World Bank.