Paulson Says SIV Fund May Be Running by Year's End (Update3)

Let's read the spin, shall we??? Take my word for it: this has nothing to do with US citizens' best interest. This is just forestalling the inevitable pullout of the US' military from the rest of the world. Demobilization will take some time ... Meanwhile, be prepared, Social Security is going to be GUTTED. HE has spoken. We will still get the war with Iran, if Paulson's statement is to be "believed", see below. Veeger

By John Brinsley

Oct. 20 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said a fund created by some of the biggest banks to help revive the asset-backed commercial paper market should be in place by the end of the year.

``It will be more valuable if it's up and running sooner,'' Paulson told reporters yesterday after a meeting of finance ministers and central bankers from the Group of Seven nations. ``It will take a while, but it should be done by the end of the year.''

Traders are becoming more pessimistic as losses on structured investment vehicles, which borrow in short-term markets to buy longer-dated assets, add to concern over the fallout from record U.S. mortgage foreclosures. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund of as much as $80 billion to rescue the SIVs.

Paulson has used contacts from three decades on Wall Street to prod the nation's largest banks to avoid a fire-sale of $320 billion in assets held by SIVs. Credit-default swaps rose the most in three months this week as some investors questioned whether the plan will work.

Paulson said the deal, which his department brokered, will reassure financial markets, rebutting criticism from economists including former Fed Chairman Alan Greenspan that the fund could do more harm than good.

``It's not clear to me that the benefits exceed the risks,'' Greenspan said in an interview published yesterday with Emerging Markets magazine. ``The experiences I've had with that sort of intervention are two-sided.''

`Best Assets'

Paulson said ``the concept is not to buy bad assets or assets that have credit problems.'' Investors will buy ``assets that aren't credit-impaired and don't have credit issues -- the very best assets. And that will accelerate the return of liquidity to parts of this market,'' he said.

Paulson delivered that message to his counterparts at the G-7 meeting, where there was some discussion of the banks' rescue among officials from the U.S., Japan, Germany, the U.K., France, Italy and Canada, David McCormick, the Treasury's top international official, told reporters today.

``There was some discussion at the G-7 ministerial,'' McCormick, the undersecretary for international affairs, said on a conference call. Paulson ``just elaborated a bit on how he thought it was an important step and a useful step,'' he said.

`Not a Bailout'

European Central Bank President Jean-Claude Trichet told reporters after the meeting that Paulson told them that ``it was out of the question'' that the fund include U.S. government money. ``It's not a bailout,'' Trichet said.

On Oct. 17, New York Federal Reserve Vice President William Dudley, chief of the branch's markets desk, declined to say whether the central bank supported the SIV rescue plan.

``I don't think the Federal Reserve has a formal view of whether this is a good thing or bad thing, but clearly if you can avoid a disorderly liquidation'' of assets that is ``probably a good thing,'' Dudley said.

Asked if the Fed's silence implied a lack of endorsement, Paulson said ``you'll have to ask them,'' adding that he talked with Fed Chairman Ben S. Bernanke several times a week on a variety of issues.

Bernanke and New York Fed President Timothy Geithner are ``well aware'' of the plan, he added.

`Good While'

The 61-year-old Treasury secretary, a former chief executive officer of Goldman Sachs Group Inc., conceded that the problems won't be fixed quickly. ``Under the best of circumstances it is going to take a good while,'' he said.

Concern about SIV losses helped spur the CDX North America Investment Grade Series 9 Index of credit-default swaps to jump 15.25 basis points this week, the most since July, according to Deutsche Bank AG. CDS contracts protect bondholders against default and investors use them to speculate on credit quality.

Bank of Italy Governor Mario Draghi said yesterday that Paulson said Pacific Investment Management Co., manager of the world's largest bond fund, and Fidelity Investments, the world's largest mutual-fund company, are involved in discussions on the SIV rescue.

Draghi said today that while Pimco had been mentioned, the firm ``decided not to take part.''

``Nothing is definitive such as which institutions will choose to take shares in the super fund,'' he told reporters in Washington.

``Pimco is not participating,'' the Newport Beach, California-based company's spokesman, Mark Porterfield, said in an e-mail.

See: http://www.treasury.gov/press/releases/hp

Chairman Bernanke and I also reported on the steps the U.S. has taken to protect the systemic stability of global financial markets and address the problems in the mortgage financing sector. The U.S. current account deficit, which was 6.75 percent of GDP at the end of 2005, is now 5.5 percent of GDP. I recognized the need to increase our national savings and continue reducing the fiscal deficit. I was able to report that for the just-completed fiscal year, our deficit fell to 1.2 percent of GDP, and we remain on track to balance the budget in 2012. However, growing social insurance outlays pose a medium-term challenge to the fiscal outlook, which we must address.