Banks? Plan To Help May Itself Need Help

Does the rescue plan for the credit markets need to be saved?

The plan is still being developed, but the roughly $75 billion effort to snap up troubled securities is struggling to get off the ground, days after it was disclosed by the country’s three biggest banks with the support of the Treasury Department.

Citigroup, Bank of America, and JPMorgan Chase back the plan but are just beginning to hammer out the details. Bank regulators are aware of the discussions but some say they are out of the loop. And market participants are puzzled, with investors like Pimco and T. Rowe Price balking at buying in.

Yesterday, Citigroup executives said separately that they bought some time by securing $80 billion in financing through the end of the year. That provides some relief because Citigroup can avoid a fire sale of assets at distressed prices, but it is not a long-term solution for the bank or the industry. A greater amount of backup financing is needed.

The Treasury-supported proposal for the industry, however, provides a framework for a new fund to purchase assets held by structured investment vehicles, or S.I.V.’s, that have been pressured since the credit market meltdown this summer. It is intended to help the banks backing such vehicles avoid bringing those risky loans onto their balance sheets and to spare investors — including money market funds — distress.

But the plan, which was hatched in August but leaked last week, has been plagued by uncertainties. All three banks agree on the concept but differ on the details. Other questions remain. How will the plan work? Who will participate? How much will its backers put in?

“Until we know the answers, it is tough to say just how much impact this is going to have,” said Christian Stracke, a CreditSights analyst who follows S.I.V.’s. At this point, “It’s a big mess.”

Yesterday, the big banks convened an organizational meeting at Citigroup’s headquarters in Manhattan. Each bank will have about 15 executives take part in various committees. A detailed proposal is expected in about two weeks, according to a person close to the situation.

So far, the banks agree on the larger goal: to restore stability and confidence to a vital pocket of the commercial paper market. They are concerned that if all 30 S.I.V.’s, which hold about $320 billion in assets, began selling securities at once, prices would plummet and lead to a lending freeze.

But each bank has something different at stake in participating in the Treasury-sponsored proposal.

Citigroup, which operates the four largest S.I.V.’s and could be on the hook for $80 billion, has a clear interest. If the fund was able to buy those assets, Citigroup would minimize the impact on its balance sheet. Some suggest that the plan is a Citigroup bailout, which the bank denies and has now secured temporary funding.

Bank of America and JPMorgan Chase, on the other hand, do not operate S.I.V.’s, but they do run large money market funds that invest in them. Even if their funds were never in jeopardy, any news that could rattle the overall money markets might worry their investors.

The new fund is intended to buy many of the securities owned by the S.I.V.’s, but at a cost. A S.I.V. would pay a fee for the right to sell to the fund, and part of the fee would be passed along to the banks, increasing profits.

The three big banks are still negotiating how much money they would put into the plan. Several Wall Street firms, like Goldman Sachs and Morgan Stanley, and European banks, like Barclays and Deutsche Bank, are waiting to see whether there is enough incentive to participate.

The banks have also pledged that the new backup fund would not buy risky assets, like subprime mortgage bonds. But the banks are debating the extent to which the fund will be able to purchase other risky securities, like collateralized debt obligations.

Money market fund managers are also divided over participating. Some say the effort will just delay the inevitable by repackaging bonds backed by mortgages, loans and other assets that investors know little about and that have fallen in value.

“This is just taking money from one pocket and putting it another, with admittedly slightly stronger credit backing,” said William H. Gross, the chief investment officer of Pimco, the huge bond manager.

Mr. Gross, whose firm manages about $700 billion in assets but does not hold asset-backed commercial paper issued by S.I.V.’s, said the situation reminded him of Japanese banks that refused to sell or write off troubled loans at distressed prices in the 1990s. Then, United States Treasury officials advised their counterparts in Japan to move swiftly to clear their portfolios of problem debts. Today, Treasury officials are doing the opposite, he added.

Vikas Bajaj and Edmund L. Andrews contributed reporting.

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