Banks pony up, but will it help?

FORTUNE (New York) -- With federal regulators refusing to use tax dollars to support another bailout, the heads of Wall Street's big banks are turning to each other.

The question is, will they really be much help?

Ten banks announced on Monday the creation of a $70 billion fund, with each bank contributing $7 billion, that would be available in the event a member bank needed access to assets that can be quickly turned into cash. Later Royal Bank of Scotland joined and added another $7 billion.

On a late afternoon conference call, details were hammered out: A firm would be able to borrow up to a third of the fund. Acceptable collateral can come in the form of assets that can't easily be sold, such as large single-stock positions, commercial real estate, and private-equity investments.

Assets would be valued at a significant "haircut," to use the lingo. On the most illiquid assets, like a private equity investment, the discount could be up to 50%. The valuation would be done by two firms, selected by the group based on which banks were most disinterested in the value of that particular asset.

According to one senior-level participant in the talks, the vehicle originally was conceived as a way to buy the bad assets of Lehman Brothers while Barclays bought the good assets.

But after Barclays pulled out, and it was clear Lehman had no option but bankruptcy, the banks decided they needed to do something to reassure the markets.

"The question was, how do we send a signal that the Street wasn't going to do anything rash?" says the participant, speaking on background because he is not authorized to speak for the group. "The whole discussion moved to an industry wide vehicle."

Indeed, the fund is meant as much of a gesture as it is a source of liquidity. The Federal Reserve is still expected to be the go-to source for a bank in real need of a loan. The Fed has expanded the kind of collateral it will accept for loans through its so-called discount window, and it doesn't demand a haircut.

"I applaud the effort," says hedge fund manager and columnist Whitney Tilson, "but the fundamental question is, why would anybody use this if they wouldn't use what the Fed offers them?"

Of course, the fund's money could look better if the Fed decides in the future to be less generous. The weekend, after all, showed what happens when the government feels it has done its part.

The original ten banks - Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman, JPMorgan, Merrill Lynch, Morgan Stanley, and UBS - have collectively taken $232 billion in write-downs and losses related to mortgage-backed assets, almost half of the $511 billion taken globally, according to statistics compiled by Bloomberg.

Given that huge volume, is $77 billion enough? "I'm glad they're doing something, but it seems small," says Scott Stewart, professor of finance at Boston University's School of Management.

William Poole, former chairman of the St. Louis Fed, thinks Wall Street's problems run far deeper than easily available access to cash. The Street, he says, needs a better way to finance its lines of business.

"The Federal Reserve can provide emergency resources, and they just increased the size of that facility," he says. "But the lending facility... it's of marginal importance. It may help to ease some firms past a crisis over the next few days, but it won't solve the problem of too little capital."