Banks to buy distressed securities

NEW YORK -- The nation's three largest banks said Monday they are teaming up to create a rescue fund of sorts -- potentially as large as $100 billion -- to help bail out troubled global credit markets.

Citigroup, Bank of America and JPMorgan Chase & Co., at the prodding of the Treasury Department, will buy distressed debt from markets roiled during the summer's financial crisis. The joint effort is the result of more than a month of talks mediated by the government.

The plan is designed to inject more confidence into the market and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs and which has historically been considered very safe, locked up this summer.

That followed a crisis in the mortgage industry, as people defaulted on their home loans at a skyrocketing rate. It caused a widespread aversion to risk and led the Federal Reserve to pump money into the financial system, though the latest plan relies more heavily on the banks themselves.

It was not known how much money would be put into the fund, but there have been reports it could be between $80 billion to $100 billion. Each bank will put up an unspecified amount of its own capital into the fund.

"The problem is festering and I think they are trying to get ahead of it," said Professor Scott Stewart of the Boston University School of Management. "This is exactly what they should be doing -- accepting responsibility instead of asking the government to bail them out."

Treasury Secretary Henry Paulson, who met personally with chief executives from all three banks, said he's pleased with the plan and "that it will have real benefits to the marketplace."