A branch of Citibank in Tokyo, April 27. Citi said it was taking US$49 billion of SIV assets onto its balance sheet. - File

The three top U.S. banks said they have abandoned a government-supported plan for a fund to bail out structured investment vehicles after Citigroup and others launched independent rescues, making the fund unnecessary.

The retreat from the potentially US$80 billion Super-SIV by Citi, Bank of America and JPMorgan Chase was not surprising to many analysts, who said the fund was a flawed idea and would have been difficult to execute.

But the lack of demand for a super-SIV fund was seen as a positive in jittery money markets, where rates have been high enough to trigger central banks globally to conduct auctions to thaw the market.

"It's akin to not having to use your insurance policy - the reasons for the fund to be there have gone away, which is good news for the money markets," said Peter Crane, who tracks the money market mutual fund industry at Crane Data in Westboro, Massachusetts.

The banks said in a statement late Friday afternoon that they had determined how the Super-SIV, known as Master Liquidity Enhancement Conduit (M-LEC), would work and that the fund was ready to be launched if market participants had demanded it.

But, the banks added that feedback from possible financiers and users of the fund indicated it was no longer necessary because SIVs were selling assets on their own, finding other ways to raise money or otherwise restructuring.

The rescue fund was announced in mid-October as many SIVs were struggling to refinance short-and medium-term debt to fund longer-term assets including mortgage assets.

The big fear

Many banks and investors had feared SIVs would dump bonds into financial markets, creating a fixed-income glut that could have driven up borrowing costs.

The U.S. Treasury hosted discussions about the fund, but many analysts even at the time questioned whether it would work since it was not clear why investors who had lost faith in the assets in one structured vehicle would be more comfortable with the same assets in a different vehicle.

Since then, the roughly US$350 billion of outstanding SIV assets have fallen to under US$200 billion by Reuters' tally, as banks have rescued funds, assets have been sold and funds have been otherwise restructured.

Citi last week said it was taking US$49 billion of SIV assets onto its balance sheet, following similar moves from HSBC Holdings plc and Rabobank.

Citi, JPMorgan and Bank of America said M-LEC may be revived if there is demand.

MONEY MARKETS RALLY

The news was positive for money markets, where three-month dollar deposit rates fell to 4.68 per cent from about 4.76 per cent.

The money markets, where banks fund one another and companies and other entities borrow short term, have been in disarray for weeks.

Rates have been high relative to where central banks are setting short-term rates because of concern about how much bad debt may be on the balance sheet of financial companies.

Those relatively high rates make borrowing more expensive for companies and consumers, which could weigh on economic growth.

On December 12, the U.S. Federal Reserve, the European Central Bank, and the central banks of Canada, England and Switzerland announced plans to auction money-market instruments to nudge global money markets.

The banks' retreat from the bail-out fund comes four days after they said they expected the Super-SIV to launch soon. Money manager BlackRock Inc had been selected to manage M-LEC.

Late on Friday afternoon, the U.S. Treasury Department said in a statement that it welcomed efforts to enhance liquidity in the short-term credit markets.

- Reuters