World’s Largest Banks Create A Fund To Save One Another

We few, we happy few, we band of brothers;
    For he to-day that sheds his blood with me
    Shall be my brother; be he ne’er so vile…  Saint Crispen’s Day Speech.

Ten of the world’s largest banks will form a fund with a value of $70 billion, each putting in $7 billion. The banks are Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse Group (CS), Deutsche Bank AG (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS) and UBS AG (UBS).

Of course, Merrill is gone now, so its share can go to another bank.

According to Reuters, the stated reason for the fund is that "any one of the 10 banks would be permitted to borrow up to one-third of the total facility." This will be on top of the Fed’s plan to make more easy credit available to banks and brokerages.

The trouble with the idea is what becomes of the fund if any three of the members need to draw the 33% to which they are entitled? That would not only obliterate the fund. It would vex the other banks who might need capital if the credit crisis grows long and much worse. That could well lead to unhealthy squabbling among the fellows and a dissolution of their friendship.

The fund is really a risk by the stronger banks to support their weaker peers. Goldman, BAC and Deutsche have financial assets which are certainly the envy of the others.

One way to look at the $70 billion pool is that it is a way for the better-off companies to prop up the others so that they can buy them in a crisis. Supplying capital could be seen as a de facto form of ownership. It is certainly a form of leverage in a market were more takeovers will be necessary if not encouraged.

The $70 billion is a buyout fund of sorts. It is just not presented that way.

Douglas A. McIntyre