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Last Updated: Monday, 12 November 2007, 13:56 GMT
'Green light' for US asset rescue
Foreclosure on a home in California
Banks hold hundreds of billions of pounds of US mortgage-linked debt
A plan by major US banks to heal bruised credit markets could be in operation by December, reports say.

Citigroup, Bank of America and JPMorgan Chase are said to have agreed on the structure of a $75bn (36bn) scheme that will buy debt of weakening value.

It is hoped that the fund will prevent a mass dumping of investments soured by the US home loans crisis, which has led to downgrades of packages of debt.

None of the banks were immediately available for comment.

News of the agreement was reported by the New York Times and the Bloomberg news agency.

It had been thought that the scheme had stalled after Citigroup warned earlier this month it faced losses linked to bad US home loan debt of between $8bn and $11bn.

On the day the agreement was said to have been reached last Friday, Bank of America and JPMorgan Chase both confessed that they too had been hit by the weakening credit market and warned that they faced losses as a result.

Terms

Under the terms of the plan designed to help prop up flagging securities linked to deteriorating US mortgage debt, Citigroup, Bank of America and JPMorgan Chase will each put in about $5bn into the pot.

This will contribute to a planned $75bn fund that will act as a purchaser of last resort for assets that have severely fallen out of favour with investors.

The banks will now canvas industry colleagues to raise the required cash.

If successful, the superfund could be in operation by December.

Scepticism

But many analysts are sceptical about the potential benefits of such a backup vehicle.

They say it would not be able to provide adequate support to the troubled sector specialising in debt packages, which in total is worth hundreds of billions of pounds.

In addition, it is widely believed that the mortgage and credit card-related debt held in these securities will never recover their former appeal and therefore the fund will just delay the pain from losses that are inevitable.

One of its few virtues, they say, is that it will hopefully prevent the wide-scale dumping of distressed securities and pave the way for an orderly wind-down which would allow investors to reclaim some of their original investments.

Credit crisis

The credit crunch was triggered by record defaults among risky mortgage borrowers in the US, known as sub-prime.

It turned out that much of that debt had been repackaged and sold to banks around the world.

The value of those debt packages was called into question, leaving banks reluctant to lend money to each other, because there was such uncertainty about who had the most exposure to such debt products.

It was hoped that the setting up of a fund to create a market for these debt products could prevent panic selling.

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