Superfund collapse 'embarrassing to Treasury
( FT )- The collapse of the plan to create a $75bn "superfund" is embarrassing to the US Treasury, which backed the scheme, but is not likely to have big implications for financial markets, analysts and former officials said at the weekend.
The idea - to create a fund to support liquidity in the market for housing-related securities - was killed off late on Friday when the banks behind the scheme abandoned it after little interest from other financial institutions.
The former Goldman Sachs duo of Hank Paulson, the Treasury secretary, and Robert Steel, the undersecretary for domestic finance, helped to broker the original agreement to create a massive fund to buy housing-related securities. The idea was to provide liquidity in the market for asset-backed commercial paper, allowing managers of structured investment vehicles ( SIVs ) and conduits unable to obtain refinancing from investors to run down holdings without resorting to a firesale of assets.
At the time the plan was unveiled people involved talked in the region of $75bn-$100bn (EU52bn-EU70bn, ?39bn-?50bn). But by the time the banks trying to create the fund - Citigroup, Bank of America and JP Morgan Chase - and asset manager BlackRock pulled the plug expectations had fallen to not much more than $20bn.
As rumours spread that the deal was to be shelved, the reaction in the money market was relief rather than anxiety. Peter Crane, of Crane Data, told Reuters: "It is akin to not having to use your insurance policy - the reasons for the fund to be there have gone away, which is good news."
The US Treasury always emphasised the plan was a private sector initiative and was not intended to preclude other restructuring efforts.
However, officials took credit for convening the negotiations that led to the agreement, which was widely seen as one of the main planks of the administration's strategy for dealing with the credit crisis.
A former administration official said the supersiv had been in trouble from the start, with many in the markets deeply sceptical. The Federal Reserve failed to offer public support, while Alan Greenspan, former Fed chairman, voiced concerns.
European policymakers were privately doubtful as to whether the supersiv would work. With the US Treasury holding back for fear of giving the impression that it was a government plan, no one offered a full explanation of what its purpose was and how it would operate.
Such a fund could not be set up overnight and negotiations were complicated by the turmoil in the top ranks of the US banking industry.
In the event, the supersiv was overtaken by events. Managers of SIVs and conduits unable to wait for it found other ways to dispose of assets, with the sector shrinking by roughly $150bn since the plan was announced, according to one person close to the talks.
Citigroup announced that it was taking $49bn of its SIV assets on to its balance sheet, following similar moves by HSBC and others. A massive expansion of lending by the Federal Home Loan Banks allowed banks taking housing-related assets on balance sheet to obtain cash against this collateral.
Mr Paulson is focusing his efforts on selling the other deal he brokered - to freeze the interest rates on some subprime loans and fast-track others for refinancing. This time the Fed is visibly behind the scheme.