US banks agree $75bn SIV bailout details

The Wall Street giants setting up a $75bn (£36bn) emergency fund to alleviate the global credit crisis will shortly send out term sheets inviting rival banks to invest in the vehicle after hammering out the basic structure.

Citigroup, JP Morgan Chase and Bank of America, which have led the effort, have each agreed to invest between $5bn and $10bn into the so-called Master Liquidity Enhancement Conduit, or M-LEC. The rest will need to be raised by other banks, who thus far have been cool to the proposition in part because it was unclear how it would function.

The trio of banks, each of which has exposure to the troubled market for structured investment vehicles, or SIVs, hope to get the fund up and running by mid-December. They will send the proposal to between 60 and 70 other financial institutions. The banks have held meetings with the credit ratings agencies to establish a framework to rate the creditworthiness of the fund.

SIVs are vehicles that rely on short-term debt to buy into longer term, higher-yielding securities. As the global credit crunch took hold this summer, the value of the assets underpinning SIVs plummeted, triggering forced asset sales as certain financial thresholds were breached.

The purpose of the super-fund is to inject a buyer into a market where there are essentially none at the moment, and to forestall a flood of assets being dumped on to the market. The fund is expected to set a market price for SIV assets and to buy some time for struggling vehicles until a hoped-for market recovery.

It is unclear whether such a recovery will occur. In a recent note, Paul Kerlogue, the senior credit officer at Moody's, the credit rating agency, said: "Since mid-August, the majority of SIV managers have been active in restructuring their vehicles to cope with the current liquidity and market value environment. Several managers hold the view that the short-term debt market for SIV paper has been permanently disrupted, and that the SIV model will not survive in its current form."

Observers said the effects of the fund could be severely limited. There are about 30 SIVs holding more than $250m of assets. The M-LEC will not invest in SIVs that invest in securities related to sub-prime mortgages.