The Big Bank Bail Out

In a move reminiscent of the bail out of Long Term Capital Management in the late nineties, a group of large banks led by Citigroup, Bank of America, and JP Morgan have been in discussions to financially back approx. $100 billion in troubled investments tied to subprime mortgages. The concern is that "bank-affiliated funds will be forced to unload billions of dollars in MBS" which would in turn cause auction sales which would further drive down the price of these securities. The bigger fear is that after banks sustain this hit, they will be less inclined to approve loans to homeowners and businesses...further damaging the economy.
Many banks have created structured investment vehicles (SIV), which buy long term higher yielding long term debt, and issue short term debt at low rates because of their high credit rating. However, as the value of subprime has fallen, so has the credit quality of these vehicles. This has made it increasingly difficult for SIVs to roll their debt (issue new debt to redeem maturing debt). The plan ... which is tentatively named "Master-Liquidity Enhancement Conduit" (sounds like a physics experiment) would create a fund backed by the banks to issue short-term debt while also buying assets currently held by the SIVs. This superconduit would be financially backed by the big banks, and thus reassure the risk-averse investors that the SIVs initially attracted.
-JK