(Adds further comments from Steel, FSA chair Callum McCarthy on credit crunch response)
WASHINGTON (Thomson Financial) - The new asset-backed 'superfund' set up by major US banks is 'expected to be temporary and serve as a bridge' that will allow time for structured investment vehicles (SIVs) 'to restructure in a more orderly fashion,' US Treasury Under Secretary for Domestic Finance Robert Steel said today.
He was speaking at the Institute of International Finance, a trade group of major international banks, in Washington.
Trading in asset backed commercial paper (ABCP) is 'typically a very liquid and important market,' Steel said, but it was recovering more slowly than other market segments from the subprime-created credit crunch.
The Treasury, banks and other investors feared the 'particular risk of a disorderly unwinding' of SIVs. As a result of the discussions, the three biggest US banks decided to establish the new 'superfund' designed to buy up and repackage subprime and other asset backed commercial paper so its holders would not be forced to liquidate their investments at fire-sale prices.
Steel said the technical organization of the fund is complex but the banks are making progress and 'participation is expected to broaden' in coming weeks.
Answering critics who call the fund a bailout for big banks and investors, he said the Treasury's and banks' 'effort is focused on improving market conditions so as to benefit all market participants, and not a particular subset of the market.'
In a question-and-answer session, Steel reiterated that the Treasury Department has not decided on a regulatory approach to handling the problems revealed by the summer's credit crunch, and said Treasury would 'diagnose before we prescribe'.
He also said Treasury is cognizant of the need to ensure that it does not take steps to bail out investors, a reference to the moral hazard problem that some have cited.
Steel reiterated that the US has already put out guidelines aimed at improving investor protections for hedge funds, and is working on a capital markets competitive initiative that should lead to recommendations by next year.
Speaking at the same event, Callum McCarthy, who chairs the Financial Services Authority that regulates all financial services in the UK, said his agency has also focused on the liquidity problem, and is continuing this work.
Also like the US, he said the UK is looking at the role credit rating agencies played in underestimating the risks associated with mortgage backed securities.
However, McCarthy said regulators should be careful not to overreact to this problem, and said regulators must consider the costs of regulatory actions as well as their intended benefits. dennis.moore@thomson.com dem/wash/ro/ro COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.