Treasury Department and Banks Create $100 Billion Fund

NEW YORK — The country’s largest banks are cooperating at the behest of the U.S. Treasury Department to build a $100 billion fund to back up the mortgage securities market. The New York Times and Wall Street Journal broke the news Sunday, likening the creation of the fund to the Federal Reserve’s organized bailout of the hedge fund Long Term Capital Management in 1998.

Citigroup, Bank of America and JP Morgan Chase will form a conduit to buy AAA and AA rated bonds from structured investment vehicles (SIVs) that own mortgage backed bonds. The aim is to soothe the nervous credit markets, which have suffered from a recent crunch. Investors’ lack of confidence was rattled by the downgrade of mortgage bonds and problems in the housing market. If forced to sell bonds at cheap prices the debt market might spiral, so this action signals the concern by Treasury to avert a deepening crisis.

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