CNN is reporting that a consortium of the worlds largest banks is creating a fund to back up $100B in risky (and likely underperforming) mortgage and other securities.
The fund, according to reports in the New York Times and Wall Street Journal, would be used to buy securities at risk in the current credit crunch in an effort to avoid a broader economic problem. An agreement on the fund’s framework could be announced as early as Monday, the Times reported, adding the talks were ongoing and could still result in no accord.
Back in May 2007, Federal Reserve Chairman Ben Bernanke publicly stated that the mortgage mess was contained. Since that statement was made, several major mortgage lenders and hedge funds trading mortgage backed securities have gone belly-up.
It appears that banks are taking some responsibility by preparing a fund like this. After all, these same banks made a considerable profit over the past few years from issuing and trading mortgage backed securities, so it’s only reasonable that they try to cover their tracks. On the other hand, this may just be an attempt to maintain confidence of major investors by preventing any large scale losses. It’s in the banks’ best interest to avoid any financial crisis and to keep people investing so they can earn their commission.
It is surprising that these major banks couldn’t see this coming until it was [nearly] too late. It seems that everyone involved with mortgages or real estate, even large banks, were drinking the Kool-Aid and believing the party would never end.
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