Industry, Investors React to Treasury's Public-Private Investment Plan

On Monday, the Treasury Department unveiled the details of its ""Public-Private Investment Fund"":http://dsnews.comindex.php/home/news_story/2735 aimed at removing bad mortgages from banks' books and the secondary market. This new prong of the administration's Financial Recovery Plan is intended to improve liquidity and restart lending. It will combine government guarantees and money from the bailout fund with private investors' capital to eventually buy as much as $1 trillion of risky, distressed - or what the government is calling legacy - assets.
Commenting on the plan for a public-private investment partnership, Tim Ryan, president of the ""Securities Industry and Financial Markets Association"":http://www.sifma.org (SIFMA) said, ""For the first time in seven months, I can say they’ve done it right.""
At least two major investment firms - BlackRock and Pimco - have already stepped up and said they will participate in the program as buyers of banks' distressed legacy assets. According to the ""_New York Times_"":http://www.nytimes.com, banks, which would sell mortgage assets in auctions, appear to be less enthusiastic, though no major bank has publicly said it will not participate.
Bill Gross, chairman of ""Pimco"":http://www.pimco.com/, said in a statement that the Treasury's plan was a ""win-win-win policy"" and that his company was ""intrigued by the potential double-digit returns"" it offered.
Laurence D. Fink, ""BlackRock"":http://www.blackrock.com/ chairman and CEO, said his firm plans to invest in a broad range of both mortgages and related securities through the Treasury program, and is looking at setting up mutual funds that would also allow individual investors to participate.
Fink said that the combined impact of the Treasury and Fed rescue programs could lead to economic recovery much sooner than expected. ""With all the triage from all different activities from the government, you could say that by the latter part of this year, we could start seeing the economy start restabilizing itself.""
According to the _Times_, some analysts and fund managers were surprised that the Treasury is offering to lend up to $6 for every $1 of investors' own money. The _Times _pointed out that those terms appear to be more generous than what Merrill Lynch offered when it sold a portfolio of mortgage securities to Lone Star Funds last July. In that deal, Lone Star bought Merrill’s assets for only 22 cents on the dollar and Merrill loaned Lone Star only $3 for every $1 the investor put up.
Treasury Secretary Timothy Geithner told reporters on Monday after the announcement was made that there will be no restrictions on compensation for participating investors - an issue that has surfaced as a concern following recent public outcries and congressional retaliation against executive bonus payments at institutions receiving government aid.
In an interview with _""MarketWatch"":http://www.marketwatch.com_, Douglas Elliott, an expert on the bank crisis at the Brookings Institution, cautioned that we won't know if the program will work until we see it in actual operation. ""There are substantial reasons to be concerned that the program will fizzle or prove to be too expensive for the taxpayer, but there are also some grounds for hope,"" Elliott said. He noted that one key stumbling block may be the value that the assets have already lost - as much as 70 percent in some cases.
Jeremy Siegel, a professor at the Wharton School of Business, said the plan would prove attractive to private investors since the government and taxpayers are taking most of the downside. ""If the asset values go below the purchase price, the Treasury is going to eat that loss. This plan is definitely going to work,"" Siegel said in an interview with _""Bloomberg Television"":http://www.bloomberg.com_.
John A. Courson, president and CEO of the ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA), commented that the private sector is positioned to play an important role in stabilizing the financial system. He said the plan unveiled on Monday is ""a step in the right direction"" to provide institutions with an outlet for unclogging their books. Courson also added his applause for the inclusion of commercial mortgage-backed securities (CMBS) in the program, saying the commercial real estate market has been hit hard by the lack of available liquidity and the credit crunch.
The market's reaction to the new plan was favorable on Monday. Banks stocks, in particular, showed strong gains. The Dow Jones industrial average ended Monday up nearly 500 points, or 6.84 percent, at 7,775.86, but dipped again on Tuesday, down nearly one and a half percent.
In remarks at the White House yesterday following the announcement, President Obama said the public-private investment partnership was ""absolutely critical in getting credit flowing again."" Obama praised the plan for not placing all the obligation and risk on taxpayers - whose stake in financial recovery continues to mount - but involving ""market participants who have every interest in making a profit to accurately price these assets so that the taxpayers share in the upside as well as the downside.""