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. Last Updated: 07/27/2016

Banks Plan Fund to Buy Mortgage Securities

NEW YORK -- Major banks, including Citigroup, are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.

Representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the United States or Europe into recession.

The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled heavy mortgage lending in the United States and spurred record levels of leveraged buyouts.

"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Investments in Los Angeles, which has $1.2 billion under management.

Citigroup, JPMorgan Chase and Bank of America are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.

The U.S. Treasury is involved in the discussions, but taxpayer money is not expected to be used.

The Financial Services Authority, the British market regulator, has suggested that British banks consider participating in the fund, The Wall Street Journal reported Saturday, citing a person familiar with the situation.

A spokesman for the FSA declined to comment Sunday. Swiss financial services regulator EBK also declined comment.

Spokesmen for British bank HSBC and Swiss bank UBS had no comment when asked about their involvement.

Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said.

The fund that is being contemplated would bail out funds known as structured investment vehicles.

SIVs bought assets like mortgage securities from banks and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.

But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.

The idea for a fund was first broached at a meeting at the U.S. Treasury on a Sunday in mid-September in Washington, a person familiar with the details of the meeting said.

That meeting was led by Robert Steel, U.S. undersecretary for domestic finance, and Anthony Ryan, U.S. assistant secretary for financial markets. The informal meeting lasted 4 1/2 hours as banks came up with ideas to jump-start the short-term lending markets.