A Big Surprise: Troubled Assets Garner Rewards...
Read moreA Big Surprise: Troubled Assets Garner Rewards
By ERIC DASH, The New York Times
American taxpayers are already poised to make unexpected billions from rescuing the nation’s banks. Now, they could reap another sizable profit from a government program devised to purge troubled real estate assets from the financial system.
The Obama administration made the so-called Public-Private Investment Program a centerpiece of its plan to help unlock the frozen credit markets in the spring of 2009, when a lack of buyers for complex mortgage securities threatened the health of the nation’s banks and put a drag on lending.
Under the program, the government provided matching funds and ultracheap loans to investment firms like AllianceBernstein and Oaktree Capital that agreed to buy mortgage securities from banks and other financial institutions.
Taxpayers stood to share in any of the profits, though the prospects of such a windfall were seen as secondary to the goal of unclogging the markets.
Nine months into the program, the eight investment funds chosen by the Treasury Department have generated an estimated return of about 15.5 percent for taxpayers, according to an analysis of their results through the end of June by Linus Wilson, an assistant professor of finance at the University of Louisiana, Lafayette.
Two of the investment funds — one operated by an Angelo, Gordon-GE Capital consortium and another by BlackRock — have gotten off to even stronger starts, posting returns of more than 20 percent.
That translates into a paper profit of roughly $657 million for taxpayers. Some Wall Street analysts project that taxpayers could earn as much as $6.2 billion on these investments over the next nine years, from an investment of about $22 billion.
To be sure, the funds’ standout performance can be attributed to a rally in the mortgage bond market that began late last year and may be hard to repeat.
Still, it is a remarkable turnabout. When the administration announced the Public-Private Investment Program, critics lambasted it as yet another giveaway to private equity firms and other Wall Street money managers — a program so ill-conceived that one prominent economist, the Nobel laureate Joseph Stiglitz, characterized it at the time as a “robbery of the American people.”
But the strong start of the funds has pushed aside many of those concerns.
“We feel very good about the performance to date,” said David N. Miller, the Treasury Department’s chief investment officer who oversees its bailout-related holdings.
The administration has not yet provided its own profit projections, and all proceeds will be used to pay down the nation’s ballooning debt. But any windfall, Mr. Miller suggested, would be icing on the cake for taxpayers.
The program’s main benefit, he said, has been to help revive the market for complex mortgage bonds, whose trading ground to a halt a year and a half ago. That helped break the downward spiral of asset prices and paved the way for a wave of new bond deals, which lenders rely on to finance new mortgages.
“We view that as accomplishing the mission,” Mr. Miller said.
The scope of the government’s action was scaled back before it got started. In fact, the original purpose of the $700 billion federal bailout program, authorized by Congress during the tenure of Treasury Secretary Henry M. Paulson Jr., was to buy mortgage assets much more aggressively. Instead, that money was used to make direct investments in troubled banks.
So, to restart the trading of mortgage assets, the incoming Treasury secretary, Timothy F. Geithner, announced the creation of a smaller Public-Private Investment Program. The administration hoped to establish market prices for the assets so that banks would not have to sell them at fire-sale prices, which would have threatened their solvency.
As a side effect, though, the extraordinary government interventions in the banking system made necessary by the financial crisis have turned the United States government into one of the world’s biggest vulture investors.
In addition to the $22 billion the Treasury Department has invested in the public-private program, the Federal Reserve has amassed about $69 billion of distressed loans and bonds from the 11th-hour rescues of Bear Stearns and the American International Group. That program appears poised to turn its own multibillion-dollar profit for taxpayers.
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