April 6, 2008 / 9:16 PM / in 10 years

G7 cool toward public mortgage funds-U.S. Treasury

MIAMI, April 6 (Reuters) - The idea of using public money to buy up distressed mortgages to ease a global credit crunch is receiving a cool reception from Group of Seven industrialized nations, a U.S. Treasury official said on Sunday.

The Financial Stability Forum, comprised of central banks and finance ministries of countries with major exchanges has drafted an options paper that includes a plan to recapitalize banks and repurchase mortgages, with the possible use of taxpayer funds.

The idea -- one of the more drastic options to combat the credit crisis -- is expected to be discussed at the G7 finance chiefs’ meeting in Washington on April 11.

The Treasury official said, however, it was not among “mainstream” ideas under consideration on the G7 agenda.

“We have been working closely with the FSF to form the basis of a thoughtful and comprehensive analysis of the recent turmoil and the impact it has had on global markets, but the options paper on which this particular idea is based does not appear to be one of the mainstream documents within the FSF report during the spring meetings,” the official told Reuters on condition of anonymity.

“We look forward to continuing discussions about the FSF report during the spring meetings,” the official added.

The Treasury official’s comments echo those among some European Union sources, who also reacted coolly to the idea. One source said FSF’s report on the use of public funds for mortgages was not a “central document.”

The Bush administration has opposed using taxpayer funds for direct purchases of mortgages and for wider federal mortgage guarantees, which are among proposals being pushed by Democrats in Congress.

MORTGAGE-BACKED TRANSPARENCY

Among other options, the FSF also is expected to brief G7 finance ministers and central bank governors on a plan to persuade a group of top banks to restate their financial positions based on a common valuation methodology and common prices for opaque and often illiquid mortgage-backed securities.

U.S. Treasury officials also said they are exploring ways to improve transparency among these securities, but they are not ready to copy Canada’s approach of establishing benchmark valuations.

The Financial Times quoted Robert Steel, the Treasury’s undersecretary for domestic finance, as saying in an interview published on Saturday he wanted explore ways to establish benchmark descriptions, and possibly benchmark valuations.

Asked whether the the Canadian approach, which involved JPMorgan establishing valuations for asset-backed commercial paper securities, was an interesting model, he told the FT: “You are thinking along the right lines.”

Hundreds of billions of dollars of complex mortgage-backed securities lodged on bank balance sheets are among the thorniest problems in the global credit crisis.

Because there is no liquid market for them, it is nearly impossible to establish a value for them and clearly define the potential for bank write-offs and losses for hedge funds.

Canada’s restructuring deal for $32 billion in structured investment vehicles (SIVs) that hold asset-backed commercial paper involved JPMorgan posting the price of assets held by these SIVs in an Ontario court. The plan helped unfreeze Canada’s commercial paper market last autumn.

In the United States, several banks that sponsored off-balances sheet SIVs have simply taken those assets back onto their balance sheets and booked losses.

Both Steel and Treasury spokeswoman Jennifer Zuccarelli cautioned that the Treasury was not considering any specific policy proposals and was only collecting suggestions for next steps to provide transparency that could help break the credit market logjam.

“I can confirm that we are interested in hearing new ideas on ways to improve the transparency of these types of securities, as called for in the President’s Working Group policy statement,” Zuccarelli said. “But we do not have a specific proposal in place and we’re not ready to move to a Canadian model.” (Additional reporting by Jan Strupczewski in Brussels; Editing by Maureen Bavdek)

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