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Treasury Behind Commercial Paper Plan

Consortium includes Citi, Boa and JPMorgan

October 15, 2007

By MortgageDaily.com staff

The U.S. Treasury is behind a plan by the country's biggest banks to create a superconduit commercial paper facility backed by securities including those that are mortgage-related.

In an effort to bolster market liquidity, a consortium of large financial institutions is in the process of developing a fund that would help create a market for illiquid commercial paper backed by structured investment vehicles, Bank of America announced today.

The master liquidity enhancement conduit, or M-LEC, would purchase qualifying highly-rated assets from certain existing SIVs, BoA said. The life of the fund, which could be up and running within 90 days, would be temporary.

"Access to such liquidity is intended to allow participating sellers to meet pending redemptions and facilitate asset-backed commercial paper rollovers," the statement said. "The instruments issued by M-LEC are intended to benefit from various features, including a cushion of support from junior layers of capital and liquidity backstops."

Also participating in the fund would be JPMorgan Chase & Co. and Citigroup, according to the announcement. The Department of Treasury facilitated the discussions.

Citigroup, which today reported $1.56 billion in pre-tax losses on the value of subprime mortgage-backed securities warehoused, holds $80 billion in mortgage and other SIVs, according to the Wall Street Journal -- which also noted subprime securities would be excluded.

"The joint efforts of domestic and international financial institutions, broker dealers, and investors have resulted in a potential structure to improve liquidity in the asset backed commercial paper markets," the Treasury said in a statement today. "This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets."

The move is reminiscent of actions taken by former Fed Chairman Alan Greenspan in 1998 to arrange a consortium of investment bankers to bail out Long-Term Capital Management.

"The department appreciates this global consortium's cooperation during the last several weeks and their leadership in developing a market-based response to this situation," today's Treasury statement said. "Such efforts help to foster orderly capital markets."

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