Transcripts

The Big Bank Rescue Fund

PAUL KANGAS: The nation's three largest banks are heading up an effort to try to combat continuing damage from the credit crunch. While the details of the plan are still being worked out, the group hopes it will boost investor confidence. Erika Miller reports.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: They say there's safety in numbers. Citigroup, Bank of America, JPMorgan Chase and others are creating a rescue fund that will buy billions of dollars of securities locked up by the credit crunch. Bond trader Tony Crescenzi says the strategy is designed to boost bank profits by shoring up investor confidence in the credit markets.

ANTHONY CRESCENZI, CHIEF BOND MARKET STRATEGIST, MILLER TABAK: It's capitalism that really drove the banks to make the decision. Banks are looking after themselves. And of course what is good for the banks is good for the financial system in general, hence good for Main Street.

MILLER: The group is creating what's called a master liquidity enhancement conduit, M-LEC (ph) for short. The pool will buy troubled asset-backed securities from structured investment vehicles or SIVs. Those SIVs are run by the banks, but handled off balance sheet. S&P analyst Frank Braden says the strategy is a smart one for the banks, especially Citigroup, which has roughly a quarter of the estimated SIV market worldwide.

FRANK BRADEN, BANKING ANALYST, STANDARD & POOR'S: It provides an avenue for them to not only sell these assets, but also if things did get worse, they could possibly end up on the balance sheet and that would affect the bottom line.

MILLER: The Treasury Department brokered the discussions to set up the fund, an effort being compared to the Federal Reserve's role in bailing out hedge fund long term capital in 1998. But many important details of the banks' rescue plan are still unknown, including its size, structure and risk tolerance. Most experts believe the fund will be between $75 and $100 billion. The banks hope to have the fund operational in about three months, but industry experts predict an immediate psychological benefit.

BRADEN: I think you're seeing some of the liquidity in the asset- backed commercial paper market. I think some of it is already returning, but this kind of gives it a shot in the arm and we think it's a good idea for the markets in general.

MILLER: If the plan works, experts say there could be a ripple effect throughout the credit market, reducing risk premiums on a wide range of debt securities. Erika Miller, NIGHTLY BUSINESS REPORT, New York.