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US: Bank of New York Mellon Will Oversee Bailout Fund

by Eric DashNew York Times
October 15th, 2008

The Bank of New York Mellon was named the master custodian firm overseeing the Treasury Department’s $700 billion bailout fund, the agency announced Tuesday.

The master custodian bank will hold and track the distressed assets that the government will buy as well as run and report on the auctions used to buy the assets.

Government officials called it the “prime contractor of the purchase program.”

The announcement was the latest in a series of measures taken by the Treasury Department to try and unlock the frozen credit markets. On Monday, large American banks agreed to accept government investments totaling $125 billion. Another $125 billion will be invested in smaller banks.

The Treasury also announced proposals to guarantee new debt issued by banks for three years, a move intended to encourage the banks to resume lending to one another and to customers.

It also extended the Federal Deposit Insurance Corporation’s coverage to fully guarantee deposits in accounts that do not bear interest, which are typically held by small and midsize businesses. Those moves bring the United States more closely in line with several European countries, which have adopted similar measures.

The $700 billion bailout fund had been the centerpiece of the United States effort, and naming the administrator was an important milestone.

Though a smaller piece of the government’s overall effort, it is a prestigious and potentially lucrative assignment for the Bank of New York Mellon, whose lineage includes two banks run by former Treasury secretaries. Alexander Hamilton founded the Bank of New York in 1784, and a century later, Andrew Mellon ran his family’s bank, which helped finance Pittsburgh’s transformation into a steel-making center.

As a custodial bank, Bank of New York Mellon occupies a crucial but little-noticed corner of the financial services industry, keeping track of $23 trillion of assets for huge endowments, mutual funds and pension plans for whom it acts as a corporate trustee.

As the master custodian for the bailout fund, it will play a similar role for the Treasury Department. The bank will provide record-keeping services for the portfolio and oversee all of its cash and assets. It will also provide pricing and asset valuation services, manage the reverse auctions for troubled assets, and keep track of the executive compensation limits and warrants received from institutions that sell their assets into the fund.

Treasury hired Bank of New York Mellon after a bidding process that began in early October. Ten banks qualified, but the list was winnowed down to the finalists — including Citigroup Incorporated" href="http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org">Citigroup, Wells Fargo and State Street — over the weekend, according to people close to the situation.

Treasury officials expect to fill several other positions in the next week, and have hired Ennis Knupp, a consulting firm for institutional investors, to review the proposals. Treasury is still looking for a securities asset manager to sell and keep track of the troubled mortgage-backed securities it purchases. It is also looking for a whole-loan asset manager to oversee individual mortgage loans it buys from banks.



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