WASHINGTON - The U.S. Treasury Department on Wednesday named nine fund managers to run so-called public-private partnerships that could buy up as much as $40 billion of toxic securities from banks.
The Treasury said it will invest up to $30 billion in the program, which will end up being much smaller than the Obama administration initially envisaged because the banking system has begun to recover from a severe financial crisis and is able to raise capital on its own.
In a joint statement with the Federal Reserve and the Federal Deposit Insurance Corporation, the Treasury said the nine selected fund managers have up to 12 weeks to raise at least $500 million of capital each from private investors. The Treasury will then match their equity capital and also provide debt financing up to 100 percent of the total equity in the partnerships.
Fund managers can raise more than the $500 million minimum in private money but they might not be able to get a full match from the Treasury for larger amounts.
While some of the urgency about removing toxic securities has eased since the period of high anxiety a year ago, administration officials and financial-industry participants still favor putting a program in place that could be spooled up quickly if recovery falters.
Scott Talbott, a government affairs official with the Financial Services Roundtable, a bank lobbying group, said the partnerships would add liquidity by creating a market for the securities, even if they are not widely popular at the moment.
READY IF NEEDED
As the economy has strengthens, the good news is that urgency for PPIP has decreased, Talbott said. PPIP should be fully developed so that if it is needed, it will be ready.
A Treasury official, speaking to reporters, conceded the partnership program has been scaled back but said it would still help sop up some of the estimated total $2 trillion in toxic securities and could be expanded if necessary.
While the program may be modest in size, we're certainly prepared to expand the resources committed to these programs as conditions evolve, the official said.
The Treasury said more than 100 firms applied to become fund managers, but it narrowed its final choice to nine.
They are Alliance Bernstein LP, with sub-advisers Greenfield Partners LLC and Rialto Capital Management LLC; Angelo Gordon and Co LP with GE Capital Real Estate; BlackRock Inc; Invesco Ltd; Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP; Trust Company of the West; and Wellington Management Co LLP.
INVESTORS LINED UP
Not on the list of approved fund managers was bond giant Pacific Investment Management Co (PIMCO), a vocal advocate for a toxic asset program. A Pimco spokesman said it withdrew its application in June because of uncertainties about the design of the program.
The Treasury said it checked to make sure fund managers did not have conflicts of interest that would preclude them from participation, nor other potential problems. They cannot buy or sell eligible assets to affiliates and each fund manager must invest at least $20 million of its firm's capital in the partnership they run.
Andrew Rabinowitz, a partner in Marathon Asset Management, said interest appeared to be high in the program, although it has not been possible to market it yet. We think, we don't know, that investors will think of this as a unique and attractive opportunity, he said.
Where else do you get to partner with the U.S. government to buy AAA securities, that were issued as AAA, on what looks like an attractive return profile? Rabinowitz added.
Initially, the public-private partnerships are expected to buy commercial mortgage-backed securities and non-agency mortgage-backed securities. The securities will have to have been issued before 2009 and have originally been rated AAA and be secured by mortgage loans, leases or other assets.
(Additional reporting by Karey Wutkowski and Al Yoon in New York)
(Reporting by Glenn Somerville and David Lawder; Editing by Dan Grebler)