Analysts say a fund to acquire mortgage assets and bolster credit markets is only a partial fix, The New York Times reports.
The danger that many SIVs would collapse and create ripples in the economy by making it more expensive for consumers and businesses to borrow raised alarms at the Treasury Department a month ago. Three large banks announced Monday that they would start a fund to serve as buyer of last resort for SIVs that were forced to sell billions in bonds and other debts linked to mortgages, credit card balances and other loans. Depending on how popular the fund is, it could end up with a large share of the SIV’s outstanding balance of $320 billion, The Times says.
On Wall Street, reaction to the proposal has been less then enthusiastic. Stock gauges have weakened. The Standard & Poor’s 500-stock index, which set a record a week ago, has fallen 1.5 percent since the plan was announced, in part because of weak earnings reports from companies like Citigroup and Ericsson. Treasury prices have risen as investors have sought the safety of government-backed debt.
Many investors and analysts describe the fund as a stopgap that will relieve some pressure but not address more intractable problems with mortgage securities held by the structured investment vehicles.
“It’s very much a partial fix,” Ethan S. Harris, chief United States economist for Lehman Brothers, told the Times. But he said that when combined with the efforts of the Federal Reserve, which has cut interest rates and stepped up lending to financial institutions, the fund should be “an important cushioning of the blow to the capital market.”
“There is still a shock to the economy, but it’s a lot less than it was,” Harris says.
It remains unclear how economic problems that started in the housing market with subprime loans to people with weak credit have been alleviated or forestalled by these various interventions. In speeches this week, Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve chairman, Ben S. Bernanke, acknowledged that the housing market was continuing to weaken.
The barometers that analysts use to evaluate the health of the market and the economy are providing conflicting and tentative signals. The premium that investors demand to hold risky loans rather than government-backed debt has narrowed since early September, but it remains far wider than it was at the start of the year.
“The trend is still to recovery, but it’s not a straight line up,” Andrew Feltus, a bond portfolio manager at Pioneer Investments in Boston, told the Times.