New York (HedgeCo.Net) – The Obama administration has unveiled its much anticipated program aimed at clearing toxic assets from the books of U.S. banks and finding a middle ground between inaction and nationalization.  By financing the purchase of up to $1 trillion in illiquid real estate assets, the government is hoping that its Public-Private Investment Program will revive the lending process while helping to jumpstart the economy.

“This will allow banks to clean up their balance sheets,” Treasury Secretary Timothy Geithner said.  “There is no doubt the government is taking risk.  You cannot solve a financial crisis without the government assuming risk.”  

The plan entails using up to $100 billion in the Troubled Asset Relief Program funds along with additional capital from private investors to “generate $500 billion in purchasing power to buy legacy assets with the potential to expand to $1 trillion over time,” according to a statement released by the Treasury.

Under the plan, the “Legacy Securities Program” would be instilled to protect private investors’ or hedge funds’ purchase of the assets by using money from half of the original funds.  The Treasury would match any private capital that is raised for the purchases dollar for dollar.

The Federal Deposit Insurance Corporation would oversee a facet of the plan called the “Legacy Loans Program,” which is expected to garner interest among many private investors.  With this program, the treasury would pony up half of the capital to purchase a bundle of loans while the rest of the cash would come from private investors or hedge funds.  The FDIC would then guarantee financing of up to six times the original price, then auction off the loans.

In addition, private-sector purchasers would determine the value of these assets so as to quell any fears that the government might be overpaying for the loans.

Some critics are weary that the program’s success relies exclusively on the action of private investors to step up to the plate.  The Fed’s new program to revive consumer credit, called the Term Asset-Backed Securities Loan Facility, or TALF, was a disappointment as far as popularity was concerned, with just 19 large hedge funds and other firms showing interest.  Out of the $200 billion offered, only $4.7 billion in requests for loans came in.  

Another reason cited for the lack of big-money interest in the programs is the mess that unfolded after AIG handed out $165 billion in employee bonuses.  A near unanimous vote in the House to tax those bonuses 90 percent may have stifled public outcry, but it did little to put to rest investor’s uncertainty regarding the government’s conflicting actions.  

Former President Bush declined to buy the toxic securities in November.  No banks have agreed as of yet to sell their illiquid assets.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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Tags: balance sheets, deposit insurance corporation, estate assets, fdic, federal deposit insurance, federal deposit insurance corporation, hedgeco, inaction, investment program, legacy assets, nationalization, no doubt, private capital, private investment, private investors, purchasing power, timothy geithner, treasury-secretary

West Palm Beach (HedgeCo.net) – Morningstar reported a sharp decline in credit and equity markets as the U.S. government announced its stimulus package and financial stability plan. February saw a huge sell-off in U.S. and European bank stocks caused by concerns of financial health and nationalization.

U.S. bank stocks hit a 17-year low and spreads on corporate bonds widened, according to the report.

"Hedge fund managers, like other investors, are nervous about the efficacy and unpredictability of government involvement in the economy. They just don’t know what the U.S. government will do next, and this uncertainty is wreaking havoc in the markets," said Nadia Papagiannis, Morningstar hedge fund analyst.

Widening spreads hurt hedge funds that invest in distressed debt, as lower-quality credits became cheaper. The Morningstar Distressed Securities Hedge Fund Index was one of the worst-performing category indexes, falling 4.1%. The Morningstar MSCI Specialist Credit and Relative Value Hedge Fund Indexes fell only 0.5% and 0.1%, respectively, as some areas of the credit market, such as leveraged loans, performed better than others.

Global non trend funds, those that make macro-economic bets, and global trend funds, those that bet on price trends in commodity and financial futures, showed mixed results in February. These funds took advantage of the rise in gold and the depreciation of the Japanese yen against the U.S. dollar, but volatility in other commodities such as oil caused declines.

Alex Akesson

Tags: accredited-investors, bank-stocks, category indexes, corporate bonds, distressed-debt, distressed-securities, financial futures, global trend, government involvement, hedge-fund-index, hedgeco, japanese yen, leveraged-loans, nationalization, price trends, relative-value, stimulus package, u s bank, wreaking havoc

Bloomberg – It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out.

The biggest loss and the hardest thing to recover, though, may be something that can’t be precisely measured — confidence in the markets and the firms that rely on them.

“The wholesale funding model lost its credibility,” said David Hendler, senior analyst at New York-based CreditSights Inc. “That started the semi-nationalization of funding in the financial markets. It’s a real chink in the armor of capitalism as supposedly the best process for allocating capital. The government is now deciding who gets access to capital.”

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Tags: bank failure, bankruptcy, capitalism, chink in the armor, confidence, credibility, financial-institutions, financial-markets, hardest thing, hendler, losses, market valuation, misery, nationalization, senior analyst, trillion, wholesale