Not content with trying to confound us with CDOs and SIVs, Wall Street’s finest have come up with an even better one – the M-LEC. The grandly-named ‘Master-Liquidity Enhancement Conduit’ is the likely name for a new $100bn fund set up to buy risky mortgage-backed securities, in an attempt to prop up a market still reeling from the sub-prime crisis.
The fund will be backed by three of Wall Street’s biggest banks. Citigroup will be the biggest contributor, while JP Morgan and Bank of America are also on board. Rumour has it that US Treasury Secretary Hank Paulson is trying to strong-arm other Wall Street banks into getting involved – though the name of his former employer Goldman Sachs (which has made a fortune by betting against the sub-prime market) has been notably absent from dispatches.
Of course, this isn’t exactly a charitable enterprise. The banks are desperate to avoid a scenario where billions of dollars worth of these dodgy securities flood into the market, sending prices even lower and resulting in big losses for all concerned (except Goldman, probably). The result could be that banks stop lending money to each other, potentially resulting in the kind of crisis that Northern Rock customers will be all too familiar with.
Citigroup has a big exposure to the sub-prime market through its SIVs (structured investment vehicles), which allow banks to invest indirectly in these securities. JP Morgan and Bank of America are also likely to lose out in a big way if the market collapses. So this is definitely a case of enlightened self interest – or as the Americans might say, CYA (Cover Your A**).
Not to mention that the three banks will charge fees for managing this huge pool of capital. As the saying goes: where there’s muck, there’s brass… Or should that be WTMTB?