Big banks' subprime fund not so super?

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KAI RYSSDAL: It's been a week of ugly reminders about the state of the credit market and the lingering effects of the whole subprime thing. Countrywide today, as Steve was telling us... Merrill Lynch with an $8-billion credit-related writedown earlier this week.

But never fear, Wall Street's got a plan. It's called the Superfund, basically -- it's come to be called that, anyway. Some big investment banks, with the encouragement of Treasury Secretary Henry Paulson, have set it up.

The basic idea is to backstop some of those complicated structured finance deals and keep things liquid. Today, John Snow, who used to run the Treasury Department, said he thinks that fund isn't really going to work. Which led us to ask: Why not?

James Saft is a columnist for Reuters. Mr. Saft, hello.

James Saft: Hello.

RYSSDAL: It's not officially called a Superfund, I guess it's called something else. But remind us how it's supposed to work.

Saft: Well, it's supposed to be a fund that buys a number of assets that have been distressed and have been difficult to trade, from other funds that the bank set up earlier. And the banks are worried that these other funds are going bad and that they will be forced to buy the loans back on their own balance sheets.

RYSSDAL: Seems to me that these banks are sort of on both sides of the fence, right? They've made these investments in subprimes and all the structured investment vehicles and funds that are out there -- and yet, now they're also starting this superfund that they're hoping is going to solve the whole thing.

Saft: I think that's exactly right, and that's because it would be very painful to go down the other options that are available to them. If they go out into the market and say "We have these structured vehicles, we have these complicated bonds, and we want to sell them" the price that they're going to get -- especially since there's so much of it that they'd all trying to be selling at the same time -- would be very low. And that's going to hit those banks, going to hit their balance sheets, and it's going to hit their ability to loan to everybody else who might need money. On the other hand, if they do what they're proposing to do, which is to set up a kind of club which will create a new vehicle and buy these loans, some of the loans, at a stated price which is not so bad, the problem there is that it doesn't give everybody else the confidence that that's a real price. You've got Citibank, for example, who's affiliated with some of the funds that are selling -- and Citibank, on the other hand, which is affiliated with the funds that are buying. It just doesn't seem as if it's the same thing as the New York Stock Exchange quotation, where one person comes in and buys from another person, and they're not in business together or affiliated.

RYSSDAL: And here we have former Treasury Secretary Snow this morning saying: "You know, this fund is only delaying the inevitable" -- that the market's eventually going to work itself all out. What are your thoughts on that?

Saft: Well, I tend to agree -- there isn't any easy way out. And if you take one bank, and it buys a bit of the loan from another bit of the bank -- which is essentially what we're talking about -- that doesn't convince me that it's produced a real price that I myself would want to invest at. The banks have too much of an interest in these loans, in these vehicles being priced at a high level so they don't have to take losses. And if they go ahead with this thing, what it won't do is it won't allow everybody else in the marketplace to confidently go out and say "I know I've got an assets that's like this, and it's worth, let's say, 95 or 90 cents on the dollar."

RYSSDAL: What I hear you saying is that really they're being incredibly short-sighted -- that they're not really understanding what's going to happen in the long run out of this fund and the whole rest of this mess.

Saft: I'm not sure that that's fair. I think that they probably understand what would happen, and that that is going to be painful for them particularly -- and holds a risk for the economy in specific -- but that there isn't a great other alternative that can get them out of that situation. I don't think that they're foolish. I don't think that they're short-sighted. I think they're simply in a really tight corner.

RYSSDAL: James Saft is a columnist for Reuters based out of London. Mr. Saft, thank you for your time.

Saft: Thank you.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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