After months of speculation, the Treasury Department has officially announced its selection of nine asset managers for the Public Private Investment Program's (PPIP) Legacy Securities Program. And the winners are...
- AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
- Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
- BlackRock, Inc.;
- Invesco Ltd.;
- Marathon Asset Management, L.P.;
- Oaktree Capital Management, L.P.;
- RLJ Western Asset Management, LP.;
- The TCW Group, Inc.; and
- Wellington Management Company, LLP.
Under the terms of the program, each firm will now have 12 weeks to raise at least $500 million from private investors in order to purchase legacy securities--i.e., the distressed mortgage-backed assets that are at the heart of the financial crisis. Treasury is committing up to $30 billion for the investments, and, importantly, the fund managers will be able to obtain additional debt financing from Treasury, the Federal Reserve, and other private sources. The upshot of this arrangement is that the fund managers and the government will split any profits 50-50, but the government will have to absorb a majority of the losses if the investments go badly.
POGO has had its eye on the PPIP for two reasons: 1) the availability of generous debt financing could result in major losses for the government, and 2) the participation of fund managers with a financial stake in the mortgage-backed securities market creates a serious potential for conflicts of interest.
Although we're still concerned about the potential for government losses--especially since the prices paid for the securities will be kept a secret from the public--we do have to give Treasury credit for beefing up its conflict of interest guidelines. For instance, it appears that Treasury is taking more proactive steps in the early stages to review and negotiate internal compliance policies with the fund managers. We're also glad to see that the guidelines were developed in consultation with staff from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), whose reports have also raised concerns that the PPIP is vulnerable to conflicts of interest. That being said, we'll be eagerly awaiting the next SIGTARP report to see if they're fully satisfied with the new guidelines--we hope, for instance, that Treasury isn't putting too much faith in the fund managers setting up “internal firewalls” to segregate the employees working for the government from the employees managing the firm's private investments.
Now that they've been selected, we can also make some initial observations about the individual fund managers. Notable for its absence is PIMCO, which had been an avid cheerleader for the program, and was considered by many to be a heavy favorite. Apparently the company withdrew its application in early June, citing “uncertainties” over the “design and implementation of the program.”
But even with PIMCO out of the running, a few other names jumped out at us as firms that are already participating in the government's bailout programs as contractors, financial agents, or recipients of funds.
First and foremost is BlackRock, which is already wearing multiple hats as an asset manager for all three of the New York Fed's Maiden Lane facilities and as an investment manager for the New York Fed's $1.25 trillion agency mortgage-backed securities purchase program. BlackRock--which, after acquiring Barclays Global Investors, became the largest asset manager in the world with over $2.7 trillion in assets under management--has already announced its plans to raise up to $5 billion for the Legacy Securities Program. Meanwhile, Wellington is already an investment manager for the agency mortgage-backed securities purchase program, and AllianceBernstein is already serving as a manager of assets received by Treasury under the Troubled Asset Relief Program. And a recent Washington Post/ProPublica investigation revealed that GE Capital has been the single largest beneficiary of funds under the FDIC's Temporary Liquidity Guarantee Program, issuing billions in debt while avoiding strict regulatory requirements that normally apply to banks.
We list these firms not to accuse them of any wrongdoing, but simply to illustrate how some companies have successfully positioned themselves to benefit from multiple bailout programs. It'll be important to keep a close watch on these increasingly entangled companies, and on any fund managers that already have a significant financial stake in the mortgage-backed securities market.
Finally, it'll be interesting to see if any banks actually want to sell their assets to the public-private investment funds. The other half of the PPIP, the Legacy Loans Program, has been indefinitely postponed by the FDIC. And while the Legacy Securities Program generated a great deal of interest among the fund managers--Treasury has received over 100 applications since the program was first announced--the selling banks have been hesitant to participate. The Wall Street Journal reports that some banks don't want to sell their assets at fire-sale prices, and that others have been able to raise private capital on their own. But stay tuned, because as Treasury's latest announcement points out, if economic and financial market conditions deteriorate again, the “programs are capable of being quickly expanded.”
-- Michael Smallberg