Oct. 15 (Bloomberg) -- Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund of as much as $80 billion to help revive the asset-backed commercial paper market.

The new company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt, the banks said today in a joint statement. Other finance companies may join, the banks said.

The plan would help SIVs avoid dumping their $320 billion in holdings, further roiling the credit markets. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases. Treasury Secretary Henry Paulson, a former chief executive officer of Goldman Sachs Group Inc., brokered talks in Washington after the commercial paper market shutdown forced the sale of about $75 billion of assets.

``Treasury and the banks are showing they're willing to deal with this directly,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``They're taking nothing for granted. This will help to deaden the speculative forces.''

The pool's size, capital structure and backing by lines of credit, are still being discussed, the banks said. People familiar with the agreement said it would be worth about $80 billion.

Paulson's `Cachet'

``Refinancing in the asset-backed commercial paper markets has been difficult despite the high quality collateral underlying many of these securities,'' the banks said. ``The objective of M- LEC is to facilitate these re-financings and to complement other market-based solutions in supporting an orderly and efficient market environment.''

The Treasury Department initiated discussions between the financial institutions at a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the Treasury's top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Paulson also made calls.

``Paulson definitely has the cachet to bring everyone to the table, because of his long experience on Wall Street,'' said Joe Mason, associate professor of business at Drexel University in Philadelphia and a former financial economist at the Treasury's Office of the Comptroller of the Currency.

Good for Economy

The plan will help shore up the U.S. economy, Paulson told reporters today in Austin, Texas.

``In the shorter term, I applaud a private-sector initiative to speed up liquidity in the asset-backed paper market,'' Paulson said. ``That can only be good for the capital markets, that can only be good for what's going on in the mortgage markets today, and can only be helpful to the economy if this works as the people leading this hope it will work.''

In the longer term, ``we'll need to take a careful look at the policy issues so we can avoid the problem that has led to this turmoil,'' he said.

The fund, known as the master liquidity enhancement conduit, or M-LEC, will finance the purchase of the assets by selling medium-term notes and commercial paper to investors, the banks said. The fund can lean on lines of credit and other support if it can't sell commercial paper, potentially making it more creditworthy in the eyes of money funds.

90 Days

While the banks are still deciding which assets to buy, the entity will purchase highly rated securities, the banks said. It probably won't buy subprime mortgage assets, according to the people familiar with the agreement, who declined to be identified because some terms weren't made public.

The pool, which will be set up in the next 90 days, will hold the securities until maturity, relieving the market of a potential sales overhang. That may also enable the fund to make money if markets rebound.

The proposal essentially transfers assets to a new entity, essentially a ``game of three-card Monte, where unrecognized losses keep getting shuffled around to hide them,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York.

The decision failed to spur a rally in Citigroup shares, which declined after the New York-based company said today that third-quarter net income fell 57 percent to $2.38 billion. Citigroup shares, which dropped $1.63, or 3.4 percent, to $46.24 in New York Stock Exchange trading. The bank's five-year credit default swaps narrowed 0.6 basis point to 25 basis points, the lowest in 10 weeks, according to data compiled by Bloomberg.

JPMorgan shares slid 1.2 percent to $46.27, and Bank of America shares dropped 1.3 percent to $51.42.

Long Term Capital

Setting up talks between the banks is the latest effort by government officials to help restore liquidity to credit markets, a campaign started by the Federal Reserve in August, when it cut the interest rate on direct loans from the central bank. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.

Treasury's involvement in bringing the banks together is reminiscent of 1998, when William McDonough, then the New York Fed president, rallied banks to bail out Greenwich, Connecticut- based hedge fund Long Term Capital Management LP after it lost $4 billion from bad bets on interest rates when Russia defaulted on $40 billion of debt.

``Like Long Term Capital Management, it just got too big and needs to be cleaned up,'' Kenneth Hackel, a strategist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note to clients today.

CP Outstanding Drops

As losses in securities linked to subprime mortgages started to spread in July, investors retreated from high-risk assets. The amount of asset-backed commercial paper outstanding tumbled to $899 billion in the week ended Oct. 10, from a high of $1.14 trillion at the end of June, according to Fed figures.

Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. The European Central Bank began adding liquidity on Aug. 9 after BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds. The Fed followed, along with counterparts from Sydney to Oslo.

``When there is a lot of turmoil in the markets the banks get together to calm things down,'' said William Isaac, who was chairman of the Federal Deposit Insurance Corp. from 1981 to 1985 and is now chairman of Secura Group LLC, a Vienna, Virginia-based financial consulting firm. ``It's a good thing.''

CP Rates

Banks that sponsor SIVs have reputations to protect so they will act to support the financing vehicle even when they have no legal obligations to do so, Moody's said in a Sept. 5 report.

``This is mostly symbolic,'' said Christian Stracke, a London-based strategist at CreditSights Inc., a New York bond research firm. ``The banks were going to need to inject more liquidity into the SIVs anyway, so the public co-operation just makes the bail-outs of SIVs seem more orderly.''

Citigroup, the biggest U.S. bank, managed SIVs with about $100 billion of assets, JPMorgan analysts wrote in a note to clients in August.

Banks worldwide manage a total 36 SIVs, according to a Moody's report in July. Bank of America, based in Charlotte, North Carolina, and New York-based JPMorgan manage conduits that sell asset-backed commercial paper typically to finance deals for clients. JPMorgan sold its SIV business to Standard Chartered Plc in London last year.

SIVs run by hedge funds including Cheyne Capital Management Ltd. in London and TPG-Axon Capital Management LP in New York were forced to sell assets at a loss after being shut out of the short-term debt market.

SIVs have at least $320 billion in assets, according to Alex Roever, a debt strategist at JPMorgan in New York who wasn't involved in the negotiations.

``Eighty billion is great, but it's not that big a number,'' said Roever. ``It still leaves you with $240 billion. That's a lot of dough. There may be enough money to pay the senior debt holders, but it's not enough to pay off everyone else.''

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net

Last Updated: October 15, 2007 17:36 EDT