$100 Billion Liquidity Fund; Banks Dipping their Toes in the Water

The principle drivers of the past housing boom where structured investments. In simple terms, wall street repackaged mortgages into securities, mixing the pot with different prime mortgages, derivatives, consumer, corporate debt and then subprime mortgages were added to the pot. Often times these securities became so convoluted they were just called asset backed securities. Wall Street and Investor appetites for these investments became insatiable and then out of seemingly out nowhere came the meteoric crash reminiscent of Bamm Bamm Rubble with his caveman club smashing everything in site. Now investors are holding billions in paper that no one wants.

Bank of America, JPMorgan and Citigroup, who announced $3 billion in subprime losses the same day, have started an estimated $100 billion dollar fund called called the Master Liquidity Enhancement Conduit or M-LEC, to help provide liquidity back into the markets and ease the current credit crisis. There is approximately $320 billion in structured investments and this “bailout” fund is designed in theory to buy this debt providing liquidity for new fundings. While this is a great first step in self correcting the mortgage problems, there are concerns that the fund is paltry compared to the $320 billion in holdings of these investments and some are hinting that the banks see a much larger problem on the horizon. This may be an indication from the big bank players, that we may only be in the 1st quarter of the game and that some financial institutions may be in more trouble than the market believes. There is still a lot of time left on the game clock.

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