Banks' fund to lift credit markets

NEW YORK - The nation's three largest banks said yesterday they are teaming up to create a rescue fund of sorts - potentially as large as $100 billion - to help bail out troubled global credit markets.

Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., at the prodding of the Treasury Department, will buy distressed debt from markets roiled during the summer's financial crisis. The joint effort is the result of more than a month of talks mediated by the government.

The plan is designed to inject more confidence into the market and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs and which has historically been considered very safe, locked up this summer. That followed a crisis in the mortgage industry, as people defaulted on their home loans at a skyrocketing rate. It caused a widespread aversion to risk and led the Federal Reserve to pump money into the financial system, though the latest plan relies more heavily on the banks themselves.

It was not known how much money would be put into the fund, but there have been reports it could be between $80 billion and $100 billion.

"The problem is festering and I think they are trying to get ahead of it," said professor Scott Stewart of the Boston University School of Management. Treasury Secretary Henry Paulson, who met personally with chief executives from all three banks, said he's pleased with the plan and "that it will have real benefits to the marketplace."

The government's role in coming up with a private sector solution to the nation's credit problems is similar to the bailout of hedge fund Long-Term Capital Management in 1998. The Fed approached Wall Street banks to rescue the firm before its wrong-way bets set off a financial shockwave.