Banks Abandon Effort to Set Up Big Rescue Fund
Treasury Backed Idea
As Response to Crisis;
Boost From Foreigners
By David Enrich and Diya Gullapalli
One of the federal government's signature efforts to ease financial instability caused by the subprime-mortgage crisis collapsed as the nation's three biggest banks gave up on a fund intended to rescue tens of billions of dollars in troubled investments.
The banks had been trying since September to set up a fund that would buy securities tied to mortgages and other assets that were controlled by banks in off-balance-sheet funds. But events overtook the effort. By the time it began to try to gather assets, banks were already handling the problem themselves.
Benn Steil, senior fellow at the Council on Foreign Relations, a nonpartisan think tank, said the plan was based on the flawed notion that the fund would pay more for tainted securities than would the banks themselves. "I'm not surprised that this didn't happen," he said. "I never believed the proposal made much sense."
Banks and Wall Street bond manager BlackRock Inc., which was overseeing the fund, issued a statement late Friday saying they no longer see the need for it. They said banks could reactivate the fund if conditions worsen.
Instead of the fund, the biggest boost to Wall Street's confidence in recent weeks has come from government-linked investors in Asia and the Middle East who have poured money into big financial firms. The latest cash infusion may come from a Singapore government investment fund that is in negotiations to invest $5 billion in Merrill Lynch & Co., which has been hard hit by subprime-mortgage losses. (Please see related article.)