- The Washington Times - Tuesday, March 24, 2009

The Treasury’s long-awaited plan to sell off toxic loans has the potential to provide windfalls for banks and investment firms that manage and participate in the program.

By providing $100 billion in cash and many times that amount in loans, the Treasury plan would enable investors to jointly purchase up to $1 trillion in bad loans from ailing banks. If the banks receive high prices on the loans - something Treasury indicates it prefers - the banks would be the primary beneficiaries, analysts say.

But if investors purchase the loans at low prices and the assets later appreciate significantly, the investors would make out like bandits.

“Will people be able to make a killing? Yes,” particularly because Treasury is willing to augment the returns for investors by providing loans worth six times their cash investments, said Arthur Levitt, a former chairman of the Securities and Exchange Commission.



The biggest winners may be the five major investment firms that the Treasury plans to hire to manage the gigantic program, Wall Street executives say. These are almost certain to include Pimco, the big bond fund, and Blackstone, the private equity group, both of which suggested the investment program to Treasury and helped design it.

The boon for banks and investment companies helped drive a gleeful stock market reaction to the plan Monday, with the Dow Jones Industrial Average surging nearly 500 points. That contrasts with the dismal market reaction to an earlier vague and unconvincing outline of the plan that the Treasury presented in February.

Mr. Levitt told editors and reporters at The Washington Times that the Treasury had to design the program to be highly profitable for investors to attract private firms to participate in today’s distressed economy and hostile political environment. He compared the bank rescue plan to previous government bailouts.

“Some people make lots and lots of money because of the sloppy way government goes about it. This is not going to be any different. … The savings and loan debacle provided vast amounts of money for certain people. That’s one of the offshoots of crisis management. It isn’t pretty.”

But the financial crisis today is much bigger than the S&L crisis of the 1980s and demands a dramatic response from the government, even if it is faulty or enriches some investors, Mr. Levitt said.

The plan crafted by Treasury Secretary Timothy F. Geithner would have a “reasonable chance” of success at ridding banks of bad assets so they can start lending again, if it weren’t for the punitive measures Congress has recently passed limiting financial executives’ pay, he said.

“That will make businessmen out there extremely careful and even hesitant to participate,” he said. Mr. Levitt was chairman of the American Stock Exchange before he was picked by President Clinton to head the SEC. Mr. Levitt now advises the Carlyle Group, a private equity firm that is exploring purchasing some toxic loans, he said.

Banks could be among the biggest winners under the program if they get high prices for loan assets that are now nearly worthless, said Peter Morici, a business professor at the University of Maryland.

“It could save many bank executives’ careers, while running up the federal deficit even further,” Mr. Morici said. “While this program could earn a profit [for the government] as did the Resolution Trust Corporation during the savings and loan crisis and the Home Owners Loan Office during the Great Depression, the program Secretary Geithner is cooking up could unnecessarily stick the taxpayer with big losses on those toxic assets and give the banks big, unearned profits.”

Joshua Rosner, managing director at Graham Fisher & Co., said one part of the program to help banks dispose of unsellable mortgage securities appears designed to enrich a handful of big investment companies with assets of more than $10 billion that Treasury intends to hire to manage the program.

He said Blackstone and Pacific Investment Management Co. (Pimco), with $747 billion of bonds under management, suggested the program to friends who are insiders at the Treasury and helped design it. No doubt they will be among the privileged few that are chosen the run the program, he said.

The funds stand to profit not only from management fees but also from any appreciation of toxic loan assets they can engineer, since the firms are carrying large portfolios of questionable mortgages themselves, Mr. Rosner said.

“The ‘securities program’ stinks like a payola,” he said. “Once the market and public figure out the reality of this program, whether tomorrow or in a few years, it will become a rightful focus of public outrage far larger than the outrage over the AIG bonuses.”

In contrast with the securities program, a separate Treasury program to dispose of individual bad loans, to be run by the Federal Deposit Insurance Corp., “is straightforward and appears clean,” Mr. Rosner said.

Pimco has made no secret of its interest in running the investment funds for Treasury. Its co-chief investment officer, Bill Gross, called Treasury’s plan “the first win/win/win policy to be put on the table” and said “we intend to participate and do our part to serve clients as well as promote economic recovery.”

Mr. Gross later told Bloomberg News that he expects Treasury will have to spend much more than it is budgeting on the program. “There is probably a few more trillions to go in terms of cleansing the balance sheets of banks,” he said.

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