GOIH Capital Markets: The Fed to the rescue...Private banks to make a bundle

Apparently the Treasury met privately with the large money center banks during the mist of the crisis and has arranged a private solution for the credit crunch. The banks will set up a super off balance sheet vehicle to purchase paper from sellers at basically pennies on the dollar. Probably most of the paper will come from their own inventory and get the junk off of their books before it goes radioactive, i.e., a total write off. Expect to see this paper repackaged and resold again to the same investors as a different instrument. That's our take on the deal.

An excerpt of the WSJ article is included below:

When it began discussions with the banks last month, Treasury made clear that a government-backed bailout or any publicly financed rescue effort was "not on the table," and that it wanted to facilitate a private-sector response, this person said.

Under the proposed rescue package Citigroup, J.P. Morgan Chase & Co. and Bank of America Corp. will set up a fund, or "superconduit," to act as a buyer of last resort. It will pay market prices for SIV assets in an effort to prevent dumping.
J.P. Morgan and Bank of America don't have SIVs, but they plan to participate because they would earn fees for helping arrange the superconduit, whose lifespan, according to people briefed on the plan, is expected to be about a year. The superconduit can buy assets from any bank or fund around the world.

Details are still being worked out but the oversight committee of the three banks will set criteria for what the new fund, to be called the Master-Liquidity Enhancement Conduit, will buy. For now, it is unlikely the fund will buy assets underpinned by subprime mortgages due to concern that they would constrain it, people familiar with the matter said. Subprime mortgages are those aimed at borrowers with shaky credit.

The plan means that some banks now stand to profit from the problems their industry helped create. Citigroup, J.P. Morgan and Bank of America, for example, will be paid fees for providing the financial backstop to the fund. In addition, the broker-dealer arms of the banks could be paid for helping the new structure raise capital. Bank of America highlighted the opportunity to generate fees in discussions leading up to the final plans, people familiar with the matter said.