Fund firms step up for Geithner's toxic-asset purchase plan
The government's plan to have private money managers partner with the Treasury to buy and manage banks' toxic assets has attracted more than 100 applicants, according to a source familiar with the program.
The deadline to apply was Friday. The government has said it expected to pick a relative handful of money managers to launch the program, but could add more later.
The list of applicants includes Southern California’s three biggest bond-market investors: Pimco (Pacific Investment Management Co.) in Newport Beach, TCW Group in L.A. and Western Asset Management in Pasadena, spokesmen for the firms confirmed.
Another bond giant, BlackRock Inc. in New York, also has applied. So did private-equity investor Wilbur Ross. Smaller financial companies also were encouraged to step up when the Treasury broadened its qualification standards on April 6.
The turnout at least shows that many fund managers believe they can make money off the program. And if they win taxpayers should as well -- if all goes as planned, and if fraud and self-dealing aren't rampant.
The public-private investment program (PPIP), unveiled in March, calls for money managers to invest alongside the government to buy banks’ troubled assets. Treasury Secretary Timothy F. Geithner envisions these partnerships buying up to $1 trillion of toxic debt to unburden banks.
There are two separate programs within the PPIP: one to buy bank loans, the other to buy securities the banks own, including mortgage-backed bonds. The application process is for financial companies that want to buy and manage securities.
The plan calls for the managers to put up some of their own capital, or capital they raise from interested investors (which may include individuals), to bid for the toxic debt. The purchases would be leveraged with taxpayers’ dollars and with government loans.
The idea is for the managers to pay prices high enough to coax the banks to sell (and thereby unburden themselves), but low enough to turn a profit on the securities down the road -- either by selling them to other investors or by waiting for the loans underlying the bonds to pay off.
The managers and the taxpayers are supposed to share in any long-term profit or loss. Along the way, the managers also are expected to earn fees for their work, which could be quite lucrative.
The applications were supposed to detail the managers’ proposed strategies for buying and managing securities, as well as fee expectations.
TCW Group’s chief investment officer, Jeffrey Gundlach, described in this post why he believed the program could work as Geithner hopes.
What still isn’t clear, however, is whether banks will be willing to sell rotten securities in volumes big enough to make it worthwhile for the fund managers and the government.
-- Tom Petruno
Photo: Treasury Secretary Timothy F. Geithner. Credit: Michael Reynolds / EPA