(Agencies)
Updated: 2007-10-15 07:38

Major banks including Citigroup are looking at setting up an $80 billion fund to buy ailing mortgage securities and other assets in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.

Representatives from the US Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets.

The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.

Citigroup, JPMorgan Chase & Co and Bank of America Corp are involved in the discussions, according to people familiar with the situation.

The three banks declined to comment. The US Treasury is involved in the discussions, but taxpayer money is not expected to be used.

The Financial Services Authority, the UK market regulator, has suggested UK banks consider participating in the fund, the Wall Street Journal reported on Saturday, citing a person familiar with the situation.

Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said.

The fund that is being contemplated would bail out funds known as "structured investment vehicles", or SIVs.

SIVs bought assets like mortgage securities from banks, and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.

But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.

Outstanding commercial paper has dropped since the summer. According to the US Federal Reserve, there was $1.87 trillion in commercial paper outstanding in the week ended October 10, down from $2.19 trillion outstanding in July.

The government-led discussions are similar to conversations the Federal Reserve Bank of New York conducted in 1998 to help organize the bailout of hedge fund Long-Term Capital Management.

Taxpayer funds were not used to bail out Long-Term, either.

Banks including Citigroup, Merrill Lynch & Co, and UBS have in recent weeks announced billions of dollars in asset write-offs and are still struggling to sell off billions of dollars in loans that financed acquisitions globally.