Friday, April 24, 2009

Warning over US toxic asset plan

Posted in the Financial Times by Francesco Guerrera, Deborah Brewster, Henny Sender and Aline Van Duyn:

The Obama administration will on Friday get the first indication of investor interest in its $1,000bn toxic assets plan amid fears that the threat of government intervention and banks’ reluctance to sell will deter fund managers from participating.

Applications to become one of the five asset managers charged with raising funds to buy mortgage-backed securities from banks are due today and groups including BlackRock, Pimco and Bank of New York Mellon are set to apply.

However, financial executives warn that the plan is in danger of missing its goal of quickly shifting billions of dollars in troubled assets off banks’ balance sheets unless the government dispels investors’ concerns.

Potential buyers of assets complain that, a month after Tim Geithner, US Treasury secretary, unveiled the public-private investment programme, the authorities have yet to reassure them they would not be subjected to draconian Congressional scrutiny.

The Treasury did say that, aside from the small group of asset managers, investors who receive the generous loans available under the PPIP will not have to abide by restrictions on employees’ pay imposed on the banks that got funds from the troubled assets relief programme.

Yet some fund managers fear Congress and the government may change the rules mid-course, as they did with Tarp. Wesley Edens, chief executive of Fortress Investment Group, said: “The most important thing for the government is consistency.”

Colm Kelleher, finance chief at Morgan Stanley, which is considering buying some of these assets, said this week: “I don’t understand what the implications for corporate governance are ... [The authorities] need to be clear what the implications are.”

Another senior fund manager said: “No one wants to go into the programme only to find out after the fact that there will be strings attached.”

These concerns have been compounded by banks’ reluctance to sell assets, particularly loans, at prices that entice buyers because the banks want to avoid fresh writedowns.

JPMorgan Chase and Citigroup have indicated that they will not participate in the PPIP.

Analysts say that other commercial banks, which do not mark their loans to market, will either not sell into the government-funded public-private partnerships or will demand high prices to avoid writedowns.

Commentary by Joe Weisenthal in the Business Insider:

Perhaps what's mot striking about the premature death of Tim Geithner's public-private partnership, is that the Treasury can't even articulate a basic set of rules for participants.

Earlier this week, a Treasury lawyer confirmed that pay caps would apply to firms participating in the PPIP. But there's still some debate as to whether that applies to sellers of toxic assets, buyers of toxic assets or both. Participants still don't know.

Commentary by Megan McArdle in the Atlantic's Asymmetrical Information:

I think it's very clear what the implications are: if you take the King's Shilling, the King gets to micromanage your life. Nor do I see what good it will do to have Treasury clarify its statement. The government is no longer capable of making a credible committment to keep its hands of firms that participate. If the voters decide that you make too much money, Congress will move heaven and earth to take that money away from you, plus some extra money, and maybe they'll deny you permission to build that bathroom addition, too. They also reserve the right to tell you how to run your company.

And in general, I am not against having strings attached to government money. Congress has a perfect right to exercise its prerogratives--but they are, I think, at odds with the goal of getting experienced managers to donate some money and a great deal of time to pricing all these bad assets. I think any rational manager right now would note that the better this deal turns out to them, the more likely they are to have a congressional committee breathing down their necks, bad-mouthing them to the press, and working overtime to tax away any profits. The upside seems limited.

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