Major Banks to Set Up $80 Billion Fund to Ease Credit Crunch

Add a new buzz word to your vocabulary, "SIVs". Structured Investment Vehicle (SIVs) are short term related notes (commercial paper) investing in long term securities with higher yields (in this case we are applying it to the sub prime mortgage debt). They are backed by pools of mortgages and credit card debt. They are offered by banks. Today, Reuters and other media groups are reporting that major banks are pooling their monies together; roughly $80 million to assist the ailing mortgage market by establishing a potential bailout fund that would prevent a stock market melt down. This is with the mindset that it will protect our economy from going into a recession if these SIVs were dumped on the market. The debate started three weeks ago. However, a decision on such a fund could come as early as Monday, October 15^th.

With the Fed easing rates last month, we have seen signs of a credit crunch possibly stabilizing; however there is still a lot of commercial paper trapped in the system that investors are staying away from. That's not a good thing. We need to have a market in these investments otherwise you create a panic. The concern is that we might have over 30 SIVs that could dump billions of dollars all at once onto the market which would force a lot of banks to have to put those assets on their balance sheet and write them off as losses. This would put an impact on our stock market especially when the August 10% drop began with stocks; the financial indexes lead the fall due to the sub prime crisis. Banks would show losses when they report to Wall Street, investors would sell banks stocks, and then you would have the domino effect on the rest of the market. Got the picture?

There are at least three major banks, Citicorp, Bank of America, and J P Morgan Chase and Company that are involved in discussions as well as the U S Treasury. They are talking about creating a "Super SIV" which would be like an emergency fund backed by world leading banks with the hopes of creating more confidence with investors in these SIVs. As mentioned above, many investors are staying away from any mortgage back securities investments until we get a better picture of the sub prime impact.

Could this be a replay of the 1998 bailout of the hedge fund Long Term Capital Management, when institutions consolidated and bailed out this hedge fund due to their bad investment decisions? Robert Arnott, Chairman of Research Affiliates LLC in Pasadena, California said earlier this month, "We are coming off of the greatest lending bubble in U.S. history. We will feel its impact for a very long time."

So what has happened to our free markets? Why are hedge funds and "Big Money" being bailed out for high risk decisions? Why is it always "after the fact"? Why aren't we doing some preventive maintenance on our banking and investment system? Where are the "checks and balances"?? Little Joe investor wants to know!

If you think that the sub prime was just about the little guy who was given fast, low interest only loans, just to get their first home, well, read the article attached. Because of greed and big money coming to the rescue of big money (hedge funds) in order to protect their own interests, we, the average Joe/Jane, will feel it in the future and so will our kids. Who is to blame? That's what I want to know.