Treasury Kicks Off Toxic-Asset Program
Thursday, October 1, 2009
The Treasury Department's long-delayed initiative to purchase toxic assets from financial firms launched Wednesday, nearly a year after Congress authorized the government to tackle what once was billed as the most critical problem facing the banking system.
With the financial crisis abating, the government's first foray into buying troubled assets totaled around $4.5 billion, a quarter of which came from private investors.
Treasury officials said the initiative could eventually expand to $40 billion, a fraction of what was initially envisioned by the Obama administration. Even at that amount, it is unclear how much impact the program would have on the markets for mortgage securities and other assets, which reach into the trillions of dollars.
The effort was scaled down significantly in recent months as banks became less interested in selling off mortgage securities at bargain prices just as they were beginning to recover their value. But the assets can still weigh down banks, constraining their ability to lend and contribute to an economic recovery, said Wilbur Ross, one of nine Wall Street financiers selected by the Treasury to manage the program.
"This is a good use of money to shore up institutions," said Ross, a leading investor in distressed businesses. "Frankly, the big part of the reason why bank lending has gone nowhere is because of these toxic assets."
Treasury officials said they believe $40 billion was the "right number" to spark interest in the securities and other assets that provide financing for all kinds of loans, including mortgages, commercial real estate debt, and credit cards. These officials said the announcement of the program made by Treasury Secretary Timothy F. Geithner in early February has already contributed to the recovery in prices of the toxic assets.
Other federal officials explain that the initiative could also serve as an "insurance policy" in case the banking system takes an unexpected turn for the worse. If that happens, the Treasury has the option of ramping up the program and using it to restore health to financial firms.
The initiative is billed as a Public-Private Investment Partnership, or PPIP, in which a fund is set up with private dollars that are matched by government money. The fund is then eligible for even more funding in the form of a government loan on favorable terms.
Ross, who heads a PPIP fund run by Invesco and a separate fund set up by TCW Group, raised a total of $1.13 billion in recent weeks. The Treasury has matched that amount, dollar for dollar.
In addition, the Treasury is offering a loan of $2.26 billion that will give the two funds even more buying power. The loan magnifies profits of the initial investment put in by the private investor and the government. But it can also expose investors to greater losses.
"I am pleased with the progress we have made in launching PPIP," Geithner said in a statement. "This program allows Treasury to partner with leading investment management firms to increase the flow of private capital into the market for legacy securities and give taxpayers a chance to share in the profits."
Seven other major investment firms are in the process of raising more money. Each has to bring in at least $500 million. These initial efforts, which will be announced over the next few weeks, could raise more than $10 billion, sources familiar with the program said.
The private money is coming from a wide range of investors, including public pension funds, sovereign wealth funds, university endowments, insurance companies and other big investment funds, according to Treasury officials, who declined to be more specific.
The officials said they are working out a procedure for providing some information about who is selling toxic assets to the PPIP funds. Any financial firm registered or regulated in the United States can sell toxic assets to the investment funds, they said.