Citi, JPMorgan Chase, BofA to create SIV’s to help market

The stock market was down sharply Monday as news that major U.S. banks will set up a fund to help bail out the credit markets stirred concerns about bad debt. Bonds fell after an upbeat economic reading. The stock market’s pullback follows concerns about debt but also as investors also await third-quarter reports due this week from more than 80 members of the Standard & Poor’s 500 index. In addition, oil pushed to new highs.

The major U.S. banks were reported to be Citigroup, JPMorgan Chase, and Bank of America Corp. It is interesting to note that HSBC is not classified as a major U.S. bank, although some analysts think HSBC might have been partially responsible for worldwide subprime problems, buying and funding contracts until a sudden and abrupt pullout caused fears around the world.

The banks, minus HSBC, announced the creation of a fund used to help revive the asset-backed commercial paper market. The fund will buy assets from structured investment vehicles, also known as SIVs, which buy corporate bonds and subprime mortgage debt. The bailout was orchestrated by the Treasury Department to avoid a fire sale in the market.

January 2008 update: The super SIV never happened. The banks said it was not needed.