In a far-reaching response to the global credit crisis, CitigroupInc. and other big banks are discussing a plan to pool together andfinancially back as much as $100 billion in shaky mortgage securitiesand other investments. So says The Wall Street Journal.
The paper adds: The Citigroup plan would create a "superconduit," a fund backed by someof the world’s biggest banks that would issue short-term debt and serveas a buyer of assets currently held by funds with illiquid or devalued securities affiliated with theparticipating banks.
The new fund represents a way for Citigroup and other banks to "outlastthe current market conditions that are so dry right now," says JaimePeters, an analyst at Morningstar Inc.
Perhaps it is not clear on the face of it how perverse this program really is. The banks plan to roll-off their worst assets and then make short-term loans to support them within the market, hoping that their value will eventually rise. That may look good, at least for a brief time.
However, if the valuation of mortgage-backed instruments drops, as many press and pundits predict, the final result will be to flush more money into a dying sector of the market.
Such brilliance is why CEO-for-life Chuck Prince is able to keep his job at Citi, no matter how many investors want him out.
Douglas A. McIntyre
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