More than 100 money managers have applied to the US Treasury to be granted fund manager status under the Public-Private Investment Programme (PPIP) and commence purchasing toxic mortgage securities with public money, the department announced yesterday.
Among institutions that have applied are traditional fixed-income, real estate and alternative asset managers. Goldman Sachs, New York-based asset manager BlackRock, and California-based bond fund Pimco have already been suggested as potential fund managers.
The Treasury has confirmed that it anticipates opening the PPIP to smaller fund managers in the future, which could result in a lower minimum capital-raising requirement than the current $500 million private capital threshold.
Under the legacy securities element of the PPIP, the Treasury will appoint an initial five fund managers to run public-private investment funds (PPIFs) that will be able to access public funds to buy originally AAA rated residential mortgage-backed securities and currently AAA rated commercial mortgage-backed securities.
Upon being designated PPIF managers, the five institutions will be granted an as yet undisclosed period of time to raise private capital to purchase legacy securities. Upon the conclusion of this period, the Treasury will match the value of the privately raised funds and extend loans up to double that value - effectively meaning that for every $1 of private capital in a PPIF the Treasury will contribute $3.
This sum could be eligible for further leverage should PPIFs be rolled into the Treasury's Term Asset-Backed Securities Loan Facility (Talf), although the exact mechanics of how the two schemes will work in relation to one other has yet to be finalised.
US Treasury secretary Timothy Geithner has defended the PPIP scheme before Congressional committees in recent weeks. Congressmen have questioned whether the upside potential for private capital partaking in the PPIP far outweighs the downside risk, while the taxpayer appears to be in the opposite position - in line for limited returns but on the hook for the bulk of any losses if the recovery on the acquired securities falls far below the purchase price.
While Geithner conceded that might well be the case, he argued that not involving private asset managers "leaves the taxpayer at acute risk of overpaying" and that private sector involvement is crucial to ensure accurate price discovery.
The Treasury expects to inform applicants of their preliminary qualification around May 15, after which fund managers can begin raising private funds. It has not yet set the cut-off date by which time PPIF managers must have hit or exceeded the $500 million private capital minimum to receive matching public funds.
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