Superfund Skepticism

October 17, 2007
By seadmin

Three of the biggest banks in the United States, Citigroup (C), Bank of America (BAC), and J.P. Morgan Chase (JPM) are creating a fund that would buy $75 billion to $100 billion of mortgage-linked securities in exchange for short-term debt.

The plan is designed to provide for an orderly sale of troubled debt and to restore confidence — and liquidity — to debt markets that have been stymied since the credit crunch began this past summer.

In a statement, the three banks said that they and several other financial institutions have agreed to create "a single master liquidity enhancement conduit" that will buy "qualifying highly rated assets" from the banks’ affiliated funds, also known as structured investment vehicles.

Here’s the "money quote" from the banks’ announcement this week:

"Access to such liquidity is intended to allow participating sellers to meet pending redemptions and facilitate asset-backed commercial paper rollovers."

That, to me, is a super-slush fund designed to bail out the credit markets. Oh, I also forgot one critical element here. The joint effort by the big banks was orchestrated by the Treasury Department and it basically is the result of weeks of negotiations between bank executives and Treasury officials.


I see this basically as a stealth version of a bailout for investors in subprime loans — a bailout that was pushed on the banks by the U.S. government. I guess laissez faire is a dead concept to the credit markets.

The coordination by the Treasury Department reminds me of the Federal Reserve’s 1998 effort to organize a Wall Street bailout of star hedge fund Long-Term Capital Management.

The more that things change, the more they stay the same.

Now amidst all of this, the S&P 500 has taken a bit of a nosedive over the past three trading sessions.

As I have been saying for several weeks now, this market needs a breather and we have taken that breather over the past few days. I do think a pullback from our recent highs, and/or a consolidation of some kind here is a necessary condition for further upside in stocks.

Remember, markets don’t go up forever, and from time to time a pullback is needed just to free up more money that can then be put back into equities.

As this market decline continues, we’ll be keeping a close watch on all of the critical support levels on all of the major averages.

If this is the start of something more than a mere pullback, we’ll know instantly.

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