Treasury Names PPIP Fund Managers

The U.S. Treasury Department announced the names of nine asset managers it has selected to run the public-private partnership funds that will buy up so-called toxic, underperforming mortgage-backed securities (MBS) -- assets that have been blamed for draining markets of much-needed liquidity. The government says it will invest up to $30 billion to get the Public-Private Investment Program (PPIP) rolling.
Those chosen from the pool of over 100 applicants to serve as PPIP asset managers include: ""AllianceBernstein"":http://www.alliancebernstein.com, and its sub-advisors ""Greenfield Partners"":http://www.greenfieldpartners.com/index.html and ""Rialto Capital Management"":http://rialtocapital.com/; ""Angelo, Gordon & Co."":http://www.angelogordon.com with ""GE Capital Real Estate"":http://usa.gerealestate.com; ""BlackRock"":http://www.blackrock.com; ""Invesco"":http://www.invesco.com; ""Marathon Asset Management"":http://www.marathonfund.com; ""Oaktree Capital Management"":http://www.oaktreecapital.com; ""RLJ Western Asset Management"":http://www.rljcompanies.com/images/RLJ07092009-A.pdf; ""The TCW Group"":http://www.tcw.com; and ""Wellington Management Company"":http://www.wellington.com.
""Pacific Investment Management Co."":http://www.pimco.com/TopNav/Home/Default.htm (Pimco) had been a frontrunner on the list of potential fund managers, but was not among the chosen few. Although the company and one of its chief executives, Bill Gross, had been a vocal cheerleader of PPIP over recent months, calling the initiative a ""win-win-win"" for all involved, Pimco reportedly withdrew its application in early June, citing ""uncertainties of the design and implementation of the program.""
The firms that were selected have been given 12 weeks to raise a minimum of $500 million each in private capital. The Treasury will match each fund’s investment and provide debt financing of up to 100 percent of the total equity of the fund. Each asset management companies is required to invest at least $20 million of its own capital, but the guidelines restrict any single investor, save the collective taxpayer, from owning more than a 9.9 percent share in the PPIP funds.
Initially, the legacy securities piece of PPIP will focus on the market for commercial mortgage-backed securities (CMBS) and non-agency residential mortgage-backed securities (RMBS). To qualify for purchase by a PPIP fund, these securities must have been issued prior to 2009 and have originally been rated AAA.
The government’s $30 billion commitment to the program is far shy of the $500 billion originally touted when PPIP was unveiled. The Treasury said financial market conditions have improved since then, with many institutions having no trouble now raising their own capital. ""While the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs,"" if conditions deteriorate, officials said.
In addition to relieving banks of bad loans and freeing up capital, PPIP is expected to facilitate price discovery within the securities markets. According to Tim Ryan, president and CEO of the ""Securities Industry and Financial Markets Association"":http://www.sifma.org/news/news.aspxxid=12328 (SIFMA), which represents 600 securities firms, banks, and asset managers, PPIP is essential to jumpstarting lending and securitization.
""Clearing troubled legacy assets off of banks' balance sheets is a positive step forward in our economic recovery,"" Ryan said. ""Selling these assets should improve the financial strength and the value of banks, which should free up the banks' ability to lend to consumers and small and large businesses at more normalized levels.""
Ryan added, ""If the purchases are open and transparent, which the industry has advocated for, it will also establish reliable market clearing prices and allow investors to know the true shape of banks' balance sheets.""
With the designation of the fund management companies, the administration says the securities portion of its Public-Private Investment Program is officially open for business and will help provide a framework to bring capital into the financial system and address the problem of legacy real estate-related assets. Government officials from the Treasury, Federal Reserve, and FDIC stressed the ""progress"" this move signified.
The agencies said in a ""joint statement"":http://www.treasury.gov/press/releases/tg200.htm that the legacy loans portion of PPIP, aimed at the underperforming mortgages banks have held on their books rather than securitized, is also moving forward. The FDIC says it will conduct a sale of receivership assets this summer to test the program’s funding mechanism, which draws upon concepts employed by the Resolution Trust Corporation in the 1990s.
The FDIC expects to solicit bids for this trial-run in July, and says it is committed to building a successful legacy loan program and will be prepared to offer it in the future as needed to cleanse bank balance sheets.
Since the details of the legacy loan and legacy securities PPIP programs were announced on March 23, the Treasury, Fed, and FDIC say they have been working together to put an operational structure in place, including setting guidelines to ensure that the taxpayer is adequately protected, addressing compensation matters, setting ""program participation limits"":http://www.treas.gov/press/releases/reports/legacy_securities_faqs.pdf, and establishing ""conflict of interest rules"":http://www.financialstability.gov/docs/PPIP_Conflict-of-Interest-Rules.pdf and procedures.