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Banks Planning Credit Flood

NEW YORK (AP) – Citigroup Inc. and other big banks are working on a plan to support the market for mortgage-backed securities and other investments by jointly creating a fund that would buy as much as $100 billion of the debt, according to published reports.

The banks met three weeks ago at the Treasury Department, which is playing an advisory role, The Wall Street Journal reported, citing unnamed people familiar with the situation.

A New York Times report Sunday pegged the fund at about $75 billion. Talks have recently intensified and the plan could be announced as early as Monday, the Journal said.

The fund is designed to prevent a sharp sell-off in assets such as mortgage-backed securities, which would send their prices crashing. That could force banks, brokerages and hedge funds with similar investments to significantly write down the value of their assets, which, in turn, could further tighten credit markets and hurt the economy.

Besides Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. are also involved in the talks, the Journal reported Saturday.

A J.P. Morgan spokesman reached Sunday by The Associated Press declined to comment. Messages were left Sunday for Citigroup and Bank of America representatives.

Citigroup has nearly $100 billion in seven affiliated structured investment vehicles, or SIVs, which use their affiliated banks' strong credit ratings to issue short-term debt at relatively low interest rates, then use the money to buy higher-yielding, riskier assets such as securities tied to mortgages.

Many SIVs recently have had trouble rolling over their short-term debt because of concerns about the quality of their assets. That contributed to the credit market troubles seen this summer.

The Citigroup plan would create a “superconduit” that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks.

Because the superconduit would be backed by the banks themselves, it would give investors the assurance they need to be willing to buy its short-term debt, or commercial paper. Bank of America and J.P. Morgan don't have their own SIVs but would earn fees for helping arrange the superconduit, the Journal reported.

The plan would help Citigroup, which is set to report third-quarter earnings Monday. The bank said earlier this month that its third-quarter profit would likely be 60 percent less than a year ago because of losses of more than $3 billion from writing down securities backed by underperforming mortgages and loans tied to corporate buyouts.