BlackRock and Carlyle Support Geithner’s Toxic Debt Plan
By Jason Kelly
March 23 (Bloomberg) -- The U.S. plan to relieve banks of real estate debt won initial support from investors, who set aside for now questions about asset pricing and whether they will be demonized for profiting from the financial crisis.
“This is not a panacea; it is not a silver bullet,” Laurence Fink, chairman of BlackRock Inc., the largest publicly traded U.S. asset manager, said today in an interview. “But this will take some of the overhang out of the marketplace. It is incrementally a really good thing.”
The Obama administration said today it’s counting on investors such as New York-based BlackRock, hedge funds and private-equity firms to buy devalued real estate loans and mortgage-backed securities from banks so they can raise capital and resume lending. The government aims to spur as much as $1 trillion in purchases by providing $100 billion in capital, as well as financing from the Federal Reserve and Federal Deposit Insurance Corp.
Financial markets rose on speculation the plan will help end the first global recession since World War II. Blackstone Group LP and Fortress Investment Group LLC, New York-based private-equity firms that have said they are interested in increasing their holdings of distressed debt, jumped 24 percent and 37 percent, respectively, in New York Stock Exchange composite trading. BlackRock gained 18 percent.
“This ambitious program is structured in a way to attract private capital and help banks sell distressed or toxic assets,” said David Marchick, head of government and regulatory affairs at Washington-based Carlyle Group, a closely held private-equity firm.
The Standard & Poor’s 500 Stock Index rose 7.1 percent to 822.92 at 4 p.m. in New York, and the S&P 500 Financials Index climbed 18 percent.
Higher Bids
Until now, investors who wanted to buy subprime mortgages and mortgage-backed securities have been unable to get financing to make such purchases, said Tom Capasse, a principal at New York-based Waterfall Asset Management LLC, which invests in mortgage-backed securities and non-performing loans. The lack of financing limited the returns that funds could generate on mortgage-related investments, and thus limited the amounts they were willing to bid for the assets, Capasse said.
The government financing should lead to bids that are 5 to 15 percentage points higher than existing price quotes for mortgage-related assets, Capasse said.
Enthusiasm Tempered
The initial enthusiasm was tempered by concern that the plan detailed today by Treasury Secretary Timothy Geithner still doesn’t address whether banks will be willing or able to unload securities at a loss.
“The big issue is whether the financial institutions will sell securities at below the current marks,” said Richard King, who oversees about $40 billion as head of U.S. fixed-income investments at Invesco Ltd., an Atlanta-based fund manager.
Banks could face another round of writedowns if assets are sold for less than the current value on their books. If that occurs, some could need to raise more capital to absorb those losses.
Paulson’s Dilemma
“This is one of the details that sunk the plan initially, and it’s still an issue,” said Steven Persky, chief executive officer of Dalton Investments LLC, a Los Angeles-based hedge- fund manager that invests in mortgages. He was referring to former Treasury Secretary Henry Paulson’s reversal last October on using federal rescue money to buy troubled assets from banks.
“The structural issue is a real problem that they have to resolve,” he said.
Half of the $75 billion to $100 billion in Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury would provide half of the capital going to purchase a pool of mortgages from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors, up to a maximum of six times the equity provided.
The FDIC will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.
“I think these assets take a disproportionate amount of management time,” said Thomas Steyer, co-managing partner of Farallon Capital Management LLC, a San Francisco-based hedge- fund firm that oversees about $20 billion. “Once they are off the balance sheets, it will help free up the credit system.”
Market Will Work
The second half of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of the initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence about the underlying value of the home loans.
“The market will find a way to price these assets,” said Edward Gainor, a partner at law firm McKee Nelson LLP in Washington who advises funds on distressed investments.
BlackRock’s Fink said his company will raise money from investors such as pension funds and endowments for the new Treasury programs. The company might consider creating mutual funds so that individual investors can also participate.
Bill Gross, co-chief investment officer for bond manager Pacific Investment Management Co., said his Newport Beach, California-based firm also would participate in the bailout programs.
‘Win/Win/Win’
“This is perhaps the first win/win/win policy to be put on the table,” Gross said.
Other fund managers that may jump in include Legg Mason Inc. and State Street Corp.
Legg Mason’s Western Asset Management unit, which manages about $550 billion in bonds and money funds, will benefit from participating in government bailout programs, analysts at Jeffries & Co. in San Francisco wrote in a report earlier this month. Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, declined to comment.
State Street spokeswoman Carolyn Cichon said the Boston- based firm is evaluating “what, if any opportunities” will come out of today’s plan. State Street manages about $1.4 trillion through its investment unit.
Lawrence Summers, the White House National Economic Council Director, said in a Bloomberg Television interview today that investors in the new debt plan wouldn’t be subject to compensation restrictions applied to banks rescued by the government.
AIG Factor
Still, questions remain over whether Congress and the administration will keep that promise in the face of mounting public pressure over bonuses paid to employees of American International Group Inc. and Merrill Lynch & Co.
“The biggest obstacle is whether the government is going to set limits on executive compensation at these funds,” said Steven Nadel, partner at Seward & Kissel LLP, a New York-based law firm whose clients include hedge funds. “If the government can give assurances that there won’t be limits, then the terms could potentially work out for all involved and create liquidity in these markets.”
The level of participation ultimately lies in the details, an area where the Obama administration has disappointed investors in previous attempts.
“We think there’s a fair amount of money on the sidelines that would be enticed back into the market,” said Andrew McCormick, head of securitized products at T. Rowe Price Group Inc., a Baltimore-based fund manager. “We would expect the program to provide clarity. We wouldn’t want to put our best investors into something where the rules are open to debate later.”
Why Not Nationalize?
Kenneth Windheim, chief investment officer of Strategic Fixed Income LLC in Arlington, Virginia, questioned the underlying premise of the Treasury’s plan: that getting private investors involved is the only way to set asset prices and unclog bank balance sheets.
“It would possibly be cheaper to nationalize the banks, get new management and sell the assets off, rather than heavily subsidize or bribe asset managers into taking part in this program,” said Windheim, whose firm manages $1.7 billion in assets. “It’s the same managers who got us into the financial mess who are now going to benefit.”
To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net
Last Updated: March 23, 2009 16:56 EDT |
