Super Fund Can Help Financial Markets: Fed Official


The Federal Reserve thinks the so-called super SIV could help beleaguered financial markets, and its silence on the matter should not be seen as indicating a lack of support for the plan, a senior Fed official said Monday.

"The silence has been misconstrued," the official, who requested anonymity, told Reuters. "The proposal looks reasonably well-designed and has the potential to contribute, rather than to impair, improvements in these markets and the process of price discovery."

The official was referring to a proposal made last week by top U.S. banks including Citigroup , Bank of America and JPMorgan Chase , for a fund to buy the assets of ailing so-called "Structured Investment Vehicles" in order to prevent a fire sale of billions of dollars worth of shaky debt assets.

Trader's Treasure Trove

Fed officials have not wanted to play a vocal role because they feel individual banks should decide whether or not to participate in the plan.

SIVs hold complicated financial products backed by U.S. subprime mortgages and other debt.

Investors had feared that, if SIVs were unable to sell commercial paper, they would dump billions of dollars on bonds, pushing bond prices down and borrowing cost up, potentially slowing U.S. and European economic growth.

Brittle Confidence

Former Federal Reserve Chairman Alan Greenspan said in an interview published on Friday that the multibillion-dollar fund may actually hurt jittery financial markets rather than help.

Building a Superfund

According to a precis of the report on the Web site of Emerging Markets magazine, Greenspan said the fund runs the risk of further undermining already brittle confidence in besieged markets and could have what the publication termed 'dire repercussions.'

U.S. Treasury Secretary Henry Paulson has repeatedly said the plan was conceived by the private sector participants, and he has underscored that Treasury's role was simply that of a facilitator.

While Treasury officials took the lead on the talks last month that led to the plan, the U.S. central bank lent its expertise. Discussions to create the pool got under way as the trouble in short-term debt markets that first arose in August persisted.

Some critics of the fund say banks are bailing out players that made bad business decisions when setting up SIVs. SIVs controlled some $370 billion of assets as of Sept. 14, and some have had trouble refinancing their debt recently.

JPMorgan Chase and Bank of America will receive fees for participating in the pool.

Other investors said the pool could help stabilize credit markets, most notably the market for short-term bonds known as commercial paper, where borrowing costs are still relatively high.