Superfund to take on assets of troubled investment vehicles

Signs of relief were seen in the credit markets yesterday following news of plans to launch a superfund that will take on the assets of troubled investment vehicles.

The cost of buying protection against US corporate default dropped to a three-month low amid hopes that the new "super conduit" fund being set up by three big US banks could inject liquidity and confidence back into opaque corners of the market.

The cost of funding in the commercial paper market also tumbled.

However, some investors were already raising doubts about how the scheme would work.

The share price of US banks also dropped after the news amid concern about the scale of problems that are still lingering in the financial system after this summer's credit squeeze.

"People are nervous and wondering why do the banks need a big fund," said Anthony Conroy, the managing director at BNYCovergEx in New York.

"What do they know that investors don't?"

The banks behind the scheme - Citigroup, JPMorgan and Bank of America - yesterday said they were still thrashing out key details about how the new "super-conduit" will purchase assets and at what price.

They have estimated that the scheme will need $75 billion to $100 billion (€52.8-€70.4 billion) of back-up liquidity lines, and will only buy high-quality assets.

The fund aims to tackle a key problem arising from the credit squeeze - the threat of a fire sale of assets, particularly housing-related securities, by investment vehicles that have been unable to fund themselves in the commercial paper market in recent months.

The new fund will repackage securities into a form that it hopes will be more appealing to investors.

Some traders also expressed concern that the new debt fund might distort the market by allowing banks to avoid recognising losses on troubled assets.

"It seems like the goal of the banks is to create an illusion of a stable market, then offload the newly created entity to investors," said Axel Merk, head of the Merk Hard Currency investment fund.

One person familiar with the plan emphasised that the masterfund would be temporary.

"They have been talking around a year,"the person said.

"Eventually everything would unwind and it would go out of existence."

This person added that the master fund would operate as a restructuring factory, repackaging securities.