U.S. to Invite The Wealthy To Invest in The Bailout
Friday, March 6, 2009
The government is seeking to resuscitate the nation's crippled financial system by forging an alliance with the very outfits that most benefited from the bonanza preceding the collapse of the credit markets: hedge funds and private-equity firms.
The initiative to revive the consumer lending business, outlined by officials this week, offers these wealthy investors a new chance to make sizable profits -- but, thanks to the government, without the risk of massive losses.
The idea is to entice them to put their huge cash piles to work to stimulate the financial system. They would be invited to buy up recently issued, highly rated securities. These securities finance consumer lending, such as credit cards and student and auto loans.
The program, which could involve the government lending nearly $1 trillion to these investors, exceeds the size of every other federal effort to address the crisis so far. The initiative's approach could be the model for future federal efforts to aid the credit markets, sources familiar with government planning said. Officials call this strategy a "public-private partnership," but in essence the government is offering good deals to private investors to draw them into its rescue efforts.
Architects of this initiative have long been sensitive to the political challenges of teaming up with hedge fund managers and private-equity firms. But officials see these private investors as among the few who have ample cash available. In public statements, officials have sought to focus attention on the ultimate goal of freeing up credit for consumers.
The Treasury Department and Federal Reserve will continue to lean on these private investors as officials expand their aid to more segments of the lending markets each month, moving from consumer credit possibly on to commercial mortgages and financial derivatives, the sources said. But there is vigorous debate between the Treasury and the Fed and within them over how the program should evolve and at what speed.
This approach will culminate in a separate program that aims to relieve banks of toxic assets, backed by distressed loans, that are clogging the firms' balance sheets, sources said. This second initiative, which officials are hoping to unveil in the coming weeks, is also expected to reach at least $1 trillion. It may create multiple investment funds, financed by wealthy investors with matching dollars from the Treasury and loans from the Fed, to buy toxic assets, sources said.
These two programs, focused on reviving consumer credit and clearing troubled assets, each exceed the size of the other elements in the financial rescue package being developed by Treasury Secretary Timothy F. Geithner. These also include a $75 billion effort to aid homeowners and an effort to inject capital into banks, which has already involved hundreds of billions of dollars in public funds.
In the past, hedge funds and private-equity firms have not been major buyers of the securities that provide financing for credit cards and other consumer loans.
But the government is turning to these investors in part because traditional buyers, such as retirement funds, mutual funds and university endowments, have fled the markets. Many are deep in the red and reeling from past forays into buying complicated debt securities. Moreover, many pension funds have rules that ban them from borrowing money to make investments, which is an essential ingredient in the government's program. So many pension funds will not be able to participate.
Federal officials, however, have not given up on the traditional investors and are considering setting up investment entities that would allow pension funds to get a piece of the profits. Officials said pension officials have expressed strong interest in this idea.
The consumer credit revival program, formally known as the Term Asset-Backed Securities Loan Facility, or TALF, has been welcomed by a range of hedge funds and private-equity firms as well as some lenders who issue assets that finance consumer loans.