'Superfund' won't save the day

Signs for Bank of America, Citibank, and JP Morgan Chase.

TEXT OF STORY

KAI RYSSDAL: It takes a while to put together an $80 billion pot of money, even for the biggest of big Wall Street banks: Citigroup, JPMorgan Chase and Bank of America, by name. They've been trying for almost a month to get a fund together to prop up the credit markets. To keep prices, for securities that no one seems to want, from going down the tubes. That would drag lots of other kinds of investment down with 'em -- a bad thing. Today we learned some more details about how that fund's going to work. Or how it might not work, depending on who you ask.

From New York, Marketplace's Amy Scott reports.


AMY SCOTT: The so-called "superfund" is supposed to rescue what are called "Structured Investment Vehicles," or SIVs. They invested too much in troubled securities like mortgage-backed bonds. The superfund would agree to buy some of those assets to prevent a fire sale. Lou Crandall is chief economist at research firm Wrightson ICAP. He says the Superfund won't touch anything related to subprime mortgages, or what he calls toxic waste.

LOU CRANDALL: So it's certainly not going to resolve the fundamental problem that the SIVs have. What it does is give them an option to fund themselves in the short run as they try to work out of the current situation.

A fix could benefit consumers. The kind of structured products the SIVs bought finance some $9 billion in consumer borrowing. But finance professor Joseph Mason, with Drexel University, says a bailout would only postpone the pain.

JOSEPH MASON: We can continue to grow this market even larger before we get that crisis, or we can take those losses now and force that next generation of financial products to evolve.

News reports say the three banks leading the superfund will have to convince other banks to pitch in about $60 billion. That's not the only hurdle. The banks plan to charge the SIVs for bailing them out. At as much as 1 percent of the assets, that could end up being a hefty price tag.

In New York, I'm Amy Scott for Marketplace.

Ryssdal: Let me take just a second here to put that superfund in a bit of context for you. A couple of analysts are saying worldwide losses from subprimes could total $400 billion. We're already at more than $40 billion in just this country so far.

If you needed more bad news about subprimes -- even if you didn't, I suppose -- the president and COO of the now-public private equity group Blackstone said today, and I quote, "the mortgage hole is deeper, darker and scarier" than he'd thought. His comments came as Blackstone reported a quarterly loss, partly on its real estate investments.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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