New Details On Toxic-Assets Program Fail To Inspire Confidence

ed to improve banks' balance sheets and promote financial healthy market activity by investing in distressed assets, the Legacy Securities Public Private Investment Program (PPIP) received a new round of criticism yesterday following its official launch by the Treasury Department. ‘Under this program, Treasury will invest up to $30 billion of equity and debt in [public-private investment partnerships] established with private-sector fund managers and private investors for the purpose of purchasing legacy securities,’ explained the July 8 joint announcement from Treasury Secretary Timothy Geithner, Federal Reserve chair Ben Bernanke and FDIC chair Sheila Bair. The PPIP, whose eligible securities in its final form now include both commercial mortgage-backed securities and non-agency residential mortgage-backed securities, will be limited to securities issued before 2009 and rated AAA (or the equivalent) by at least two nationally recognized statistical rating organizations. The design of the purchase program allows it to increase the flow of private capital into the asset-backed securities markets and promote price discovery while maintaining an equity upside for taxpayers, according to the Treasury. But the markedly reduced investment scope of this finalized version of the program – which, according to Treasury's earlier announcements, was projected to reach $1 trillion – prompted many industry observers to wonder whether a $30 billion PPIP would be worthwhile. ‘The reduced government commitment is a sign that Treasury couldn't convince banks to go along with the idea of selling their toxic securities at a discount – something that would force another round of painful writedowns,’ wrote Matthew Goldstein in a Reuters blog. Simon Johnson, an economist at the MIT Sloan School of Management, told the Los Angeles Times that the reduced PPIP is ‘inconsequential in terms of whether the banks will have enough capital’ and characterized yesterday's unveiling as a mere ‘face-saving announcement.’ In their announcement, Geithner, Bernanke and Bair defended the decision to reduce the PPIP's scope by noting the positive changes that have occurred between the program's March introduction and yesterday's launch. ‘Financial market conditions have improved since the early part of this year, and many institutions have raised substantial amounts of capital as a buffer against weaker-than-expected economic conditions,’ the trio noted, adding that the currently ‘modest’ PPIP can be rapidly expanded if conditions deteriorate once again. Yesterday's announcement also included the release of the Treasury's selections for pre-qualified firms selected to participate in the PPIP as fund managers in the initial round of the program. AllianceBernstein LP and its sub-advisors Greenfield Partners LLC and Rialto Capital Management LLC; Angelo, Gordon & Co. LP and GE Capital Real Estate; BlackRock Inc.; Invesco Ltd.; Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP; The TCW Group Inc.; and Wellington Management Co. LLP all received the nod. Not surprisingly, executives from the selected firms were quick to offer enthusiastic statements of praise for the program – despite the swirling criticism elsewhere. ‘As intended by the government, the combination of private- and public-sector investments has the potential to make a significant impact on the market for legacy securities,’ said Joseph Parsons, president and CEO of GE Capital Real Estate Global Investment Management. ‘The PPIP is an essential component of the government's efforts to stabilize the U.S. financial system,’ stated Mark Kleiman, senior managing director at Marathon Asset Management. Robert L. Johnson, chairman of the RLJ Cos., called serving as a fund manager ‘a powerful opportunity to help bring stability to the U.S. mortgage market.’ Other investment firms were more skeptical of the PPIP. Pacific Investment Management Co., which was reportedly a leading candidate for one of the fund-manager slots, withdrew its application ‘as a result of the uncertainties of the design and implementation of the program,’ a spokesman told the Wall Street Journal. The Treasury expects to announce the closing of the first fund in the PPIP in early Augus


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