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Banks Unveil Debt Damage Control

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By FLOYD NORRIS, The New York Times

Published: October 16, 2007

The biggest banks in the United States, with active encouragement from the Treasury Department, unveiled a plan Monday to keep the housing-related debt crisis from worsening.

The plan calls for the banks to create a new financing vehicle to try to restore confidence and reduce the risk of a market meltdown by propping up an important part of the debt markets. But the banks hope to take minimal risk and avoid actually investing any of their own money.

Although credit markets have calmed in recent weeks, and the stock market remains near record highs, some securities are almost impossible to sell anywhere near their previous prices. If the banks' initiative works as planned, many investors that helped finance risky loans, including supposedly safe money-market funds, will be spared distress.

The new entity, called a Master Liquidity Enhancement Conduit, or M-LEC, could raise as much as $200 billion or more through the issuance of its own securities, and use the money to buy securities that otherwise might be dumped on the market.

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