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Last Updated: Sunday, 23 December 2007, 21:36 GMT
US asset rescue scheme abandoned
Foreclosure on a home in California
A fire-sale of falling investments has so far been avoided, say banks
A plan by US banks to help calm down rattled credit markets has been dropped weeks before it was due to launch.

Citigroup, Bank of America and JPMorgan Chase said they had shelved the $75bn (37bn) fund designed to buy debt of weakening value to avoid panic selling.

The move comes after some banks, including Citigroup, launched their own rescues of investments soured by the US sub-prime mortgage fiasco.

The U-turn did not surprise many analysts sceptical of the scheme.

The banks said that they had determined how the plan, called a Master Liquidity Enhancement Conduit (M-LEC), would work and would make it available to financiers if necessary.

But they said it was no longer necessary with feedback suggesting that the threat of a mass dumping of these packages of debt, called structured investment vehicles (SIVs), had become less pronounced over recent weeks.

"Based upon the feedback that the bank consortium and the advisor have received from domestic and global liquidity sources and from prospective SIV participants, they have determined the vehicle is not needed at this time," they said.

Some relief

SIVs sell short-term debt and use the money to buy higher yielding assets, including US mortgage-backed debt.

The value of these securities has tumbled after higher interest rates in the US pushed up the number of mortgage defaults and repossessions.

As the credit crisis deepened in the summer, SIVs have been struggling to refinance their debt without being forced to sell assets at knock-down prices, a situation that prompted talk of the rescue fund in mid-October.

But the need for a bail-out of these complex investments has diminished with Citigroup, HSBC and Societe Generale recently taking SIV assets onto their balance sheet, effectively propping them up.

These independent moves were largely seen as a more effective balm to soothe investors than the scheme that Citigroup, Bank of America and JPMorgan Chase had proposed, but the fact that it was not seen as necessary gave credit markets a lift.

"It's akin to not having to use your insurance policy - the reasons for the fund to be there have gone away, which is good news for the money markets," said Peter Crane at Crane Data.

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