October 13, 2007 / 3:43 AM / 12 years ago

Treasury officials seek to help battered SIVs

NEW YORK (Reuters) - Treasury officials are looking into ways to help investment vehicles called SIVs that have been battered by this summer’s credit crisis, sources familiar with the situation said on Friday.

The Citigroup sign is seen outside the Citigroup Center in New York, October 1, 2007. REUTERS/Shannon Stapleton

Big banks, including Citigroup Inc, are discussing a plan to pool together and financially back as much as $100 billion in these investments, which include mortgage securities, the Wall Street Journal reported on its Web site.

Treasury representatives met about two weeks ago with sponsors of these vehicles, Wall Street banks and investors to discuss “how to alleviate some of the issues in the SIV market,” one source informed of the meeting by participants said.

SIVs are investment vehicles that raise cash by issuing short-term debt called commercial paper and use the proceeds to buy higher-yielding securities, often tied to U.S. mortgages. The vehicles, often set up by banks, make money by pocketing the difference between their funding costs and investment returns.

One plan that was discussed at the meeting involved setting up a “super fund” where “each SIV in the market could pledge up to one-third of its assets and get financing,” the source said.

A government source also confirmed that there is a Treasury initiative to ease funding costs in the SIV market.

The plan could also get backing banks outside the United States. The Financial Services Authority, the United Kingdom’s markets regulator, has suggested that UK banks consider participating in the plan, the Wall Street Journal reported.

The fund, which is tentatively called Master-Liquidity Enhancement Conduit, or M-LEC, could be announced as early as Monday, if banks agree, the Journal reported.

U.S. treasury Secretary Henry Paulson is scheduled to speak on Tuesday in Washington on home ownership, mortgage markets, and the U.S. economy.

The investment vehicles have been unable to sell new commercial paper for months as investors fearful of contagion from subprime mortgages have shunned most types of asset-backed commercial paper. As a result, many SIVs have run into trouble.

Jennifer Zuccarelli, a Treasury spokeswoman, said, “Treasury is always meeting market participants and monitoring market events,” but had no comment on any specific Treasury initiative.

Treasury officials also separately met with Wall Street bank treasurers a few days after the SIV meeting to discuss the state of the U.S. asset-backed commercial paper market, the source said.

A spokesman for JPMorgan Chase declined to comment. A spokeswoman at Citigroup did not return a call seeking comment.

Additional reporting by Chris Reiter

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