Superfund to Save the Day?

Three banks - Citigroup, JPMorgan Chase and Bank of America - have hired Blackrock Investments to run a $75 billion superfund. The superfund has been created to address the 2007 Banking Liquidity Crisis. The fund will provide liquidity to banks and hedge funds that bought collateralized debt obligations (CDO's) that have lost value thanks to the Subprime Mortgage Crisis. The U.S. Treasury is backing the Superfund to ward off further economic decline. (Source: FTAlphaville, Banks SIV Superfund Taps Blackrock, 11/21/07)

What It Means to You

The Superfund is a big vote of confidence by the government and the large banks. It means they will not let the banking crisis disable the U.S. economy. It is also a symptom of how serious they consider the crisis to be.

Of course, there are no guarantees that the fund will be enough to forestall a recession. However, it will probably give the banks enough time to figure out how to correctly value complicated CDO's, including Asset-backed Commercial Paper and Mortgage-Backed Securities. This, according to Federal Reserve Governor Randall Kroszner, is the primary issue that caused the crisis, and its resolution should restore the financial markets to sanity. (See Fed Governor Kroszner Says Credit Crisis May Not Be Over, 10/22/07)