Leading banks including Citigroup, Bank of America, and JPMorgan Chase have decided to drop plans for a cash fund designed to support the value of structured investment vehicles (SIVs) including securitized subprime mortgages.  The plan was endorsed by the Department of the Treasury at its outset, and has been called one of the "federal government’s signature efforts to ease financial instability" in the subprime mortgage crisis.  In reality, the government never went beyond cheerleading.

Writing in the Wall Street Journal, David Enrich and Diya Gullapalli imply that Treasury and its secretary,  Henry Paulson, squandered resources and prestige in the planned fund, and Eric Dash of the New York Times calls the decision "a setback" for Paulson.  But it’s possible that Paulson and others at Treasury are heaving a sigh of relief — for now.  The banks involved may have fixed the problem on their own, and the Journal quotes one expert as saying that the government effort worked to forestall a panic and give the banks some breathing space.

But is it too soon to say goodbye to the Master Liquidity Enhancement Conduit (considering that the name alone must have taken folks at Treasury a while to think up)?  One has to wonder how seriously Treasury took this idea in the first place (Understanding Government has previously asked whether this fund could ever work).  But more important, as home prices continue to fall, homeowner’s equity will continue to decline, which is likely to reduce overall consumer confidence.   If the economy’s success depends largely on consumer spending and optimism, Treasury should at least be trumpeting its other efforts to assist homeowners.  It appears to have dropped one hot potato, but there could be plenty more cooking.

Ned Hodgman

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