‘Super fund’ helps ease markets

Signs of relief were seen in the credit markets after news on Monday of plans to launch a “super fund” to take on the assets of troubled investment vehicles.

The cost of buying protection against US corporate default dropped to a three-month low amid hopes that the new “super conduit” fund being set up by three big US banks could inject liquidity and confidence back into opaque corners of the market. The cost of funding in the commercial paper market also tumbled.

However, some investors raised doubts about how the scheme would work, while the involvement of the US Treasury in brokering the proposal raised concerns about the scale of problems remaining in the financial system after the credit squeeze.

The share price of US banks dropped, with Citigroup, which manages $80bn of assets in such vehicles, falling 3.4 per cent.

“People are nervous and wondering why the banks need a big fund,” said Anthony Conroy, managing director at BNYCovergEx in New York. “What do they know that investors don’t?”

Anthony Ryan, assistant Treasury secretary for financial markets, said the repricing of risk following the credit squeeze was “playing out more slowly” in the commercial paper market, which played “a very important role” in the financial system. The new fund was a “transitional vehicle” that could facilitate “a more orderly reassessment and repricing of risks”.

The banks behind the scheme – Citi, JPMorgan and Bank of America – said they were still debating how the new fund would buy assets and at what price. They expect to bring in other banks to help provide the estimated $75bn-$100bn of back-up liquidity lines that would be needed.

A number of banks in other countries, including the UK, have been asked to back the fund but some remain sceptical.

The fund aims to tackle a key problem arising from the credit squeeze – the threat of a fire sale of assets, particularly housing-related securities, by investment vehicles that have been unable to fund themselves in the commercial paper market in recent months.

“A lot of the issue in the commercial paper market is about confidence,” said David Brickman, strategist at Lehman Brothers. “If a fund like this reduced the overhang [of troubled assets] this could help confidence come back.”

However, some traders expressed concern that the new fund might distort the market by allowing banks to avoid recognising losses on troubled assets.

Additional reporting by Michael Mackenzie in New York and Peter Thal Larsen in London