The nays on the public private partnership program, the Treasury’s
gimmick program to relieve banks of toxic assets, won positive comments from the obvious beneficiaries, namely banks and possible fund managers, and quite a few negative reviews from those worried about the benefits relative to the cost to the taxpayer (such as Nobel prize winners Joseph Stiglitz and Paul Krugman).
Now illustrating our latest concern, that the Treasury may turn out to be the Gang That Can’t Shoot Straight, our ongoing reservation, that there may be no way to make the program work for banks and investors even with hefty government subsidies, may be coming to pass. If investors have to overpay for assets (and unlike other analyses, we assume and have been told these assets aren’t that hard to value, the issue is bank willingness to take losses), leverage is not going to solve that problem. An expected loss is an expected loss. The only way to make it work under those circumstances is if the banks subsidize investor bids (say via non recourse loans, total return swaps). In other words, the program only works if the price setting mechanism is a sham.
The turndown by Bridgewater is particularly significant. The hedge fund one of the few to be eligible for the legacy securities program (inexplicably, the program sets a very high bar for assets under management. among other selection criteria. If the purpose is to elicit higher bids, more bidders would be a good idea). But as important, the fund is particularly well regarded, Bridgewater publishes research to which central banks subscribe.
From the New York Post (hat tip reader Phil):
In an investor note obtained by The Post, Bridgewater founder Ray Dalio gave Geithner’s plan two thumbs-down, arguing that the hopes of would-be buyers probably won’t be met by what the government is offering, especially when it comes to the sale of so-called legacy securities.
In the note, which is entitled, “Why We Decided Against Buying in the PPIP and Why We Doubt That It Will be Broadly Subscribed,” Dalio cited economic and political concerns with Geithner’s Public-Private Investment Program, dubbed PPIP, saying the numbers just don’t add up — at least when it comes to PIPP’s legacy-securities program.
PPIP aims to remove toxic assets from the system by giving private investors, such as hedge funds and mutual funds, leverage to buy assets through two programs. The legacy-securities program enables those investors to buy older residential and commercial mortgage-backed securities that have been at the heart of many banks’ troubles…..
“When the program was first announced, we were originally interested” because the leverage the government was promising made the assets cheaper. “However, as things now stand, very little leverage is actually being offered via the ‘Legacy Securities Program,’ ” Dalio wrote, pointing out that the leverage offered is just 1-to-1.
He also blasted the program for its initial design, saying it is ripe for conflicts, pointing to the plan to hire five asset managers to run everything on behalf of themselves, the government and the other investors.
“The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out,” Dalio wrote.
Bridgewater’s investors include pension funds, endowments and foreign governments.
He also questioned the political risks that the program’s design could create, saying the limited number of managers “raises possibilities (or at least perceived possibilities) of them colluding because they all know each other.”
And so regardless of whether the investments make or lose money, “there will be reasons for politicians to complain and to focus on the five winners to see how they ‘abused’ the system,” he wrote….
To be sure, Dalio doesn’t slam everything about PIPP. Indeed, he doesn’t slam the legacy-loan program, in which investors buy loans instead of securities and offers leverage of between 6-to-1 and 12-to-1.
But, “we aren’t interested in illiquid loans,” he said in his note.
Note that some analysts have said they expect to see little uptake on the loan program due to its complexity.