Private capital sceptical on bank rescue plan

Date: Wednesday, February 11, 2009
Author: Jennifer Ablan and Paritosh Bansal, UK.reuters.com

A lack of detail in a U.S. plan to cleanse banks of toxic assets has left big money managers and private firms, including leveraged buyout funds and hedge funds, still sceptical about getting involved.

U.S. Treasury Secretary Timothy Geithner on Tuesday called for a new program that combines public and private capital to be used in a fund that will buy troubled assets of up to $1 trillion (690 billion pounds), aimed at unfreezing credit markets.

The joint public- and private-sector fund is one of the main components of the government's effort, which will total as much as $2 trillion, including a revamped Fed plan to back asset-backed securities, to revive new lending and address banks' toxic assets.

Investors were given no further details, deepening the uncertainty that the new Obama administration can deliver a plan to rescue banking system.

"Today's announcement is basically, 'we have a plan to have a plan,' said James Ellman, president of Seacliff Capital, a hedge fund firm, in San Francisco.

"We don't know how the private-public partnership will work. But it does look like for the 'bad bank' the losses will mostly be suffered by taxpayers, and gains will mainly be by plutocrats."

Money managers and private firms continue to be concerned that the new plan might be a rerun of the Bush administration's management of the first $350 billion that Congress authorized last year for the so-called Troubled Assets Relief Program, or TARP. While credit markets are showing some signs of life, the overall impact has been little to the overall banking system.

Geithner renamed the second $350 billion of TARP as the Financial Stability Plan.

Some critical elements remain unclear, including exactly how the government would entice investors to participate in the private bank and how the assets would be priced.

There is also the issue of what guarantees, if any, investors would get against potential losses.

The Treasury may also have to give more guidance on accounting issues including methods on how to value illiquid securities for the plan to work.

"They need to make sure that they get the accounting straight," said Chip MacDonald, a mergers partner at law firm Jones Day. "The plan outlines a plausible approach. It has good goals. And the ideas are right. Now they have to figure out how to execute it," MacDonald said.

DEVIL'S IN THE DETAILS

The proposal to set up a public-private investment fund will involve the partnership with the Federal Deposit Insurance Corp, a bank watchdog, and the Federal Reserve, the U.S. central bank.

"I do not think there is any way to say what the 'bad bank' part of the plan will look like," Tad Rivelle, founding partner and chief investment officer at Metropolitan West Asset Management, said about the public- and private fund to mop up troubled assets.

"The efficacy of the plan will probably lie largely in the quality of its execution: how much money gets put to work, how fast, and in what ways," added Rivelle, who helps oversee $24 billion at MetWest. "The market may have been disappointed that there wasn't more detail."

That could be an understatement as the Dow Jones industrial average .DJI was down nearly 400 points on the day -- posting the worst one-day percentage drop since December 1.

Eventually, there may well be private capital participation but not before more specific terms are decided.

"We have certainly seen a lot of interest on the part of asset managers and asset purchasers to be able to look at and perhaps acquire assets in some kind of arrangement with the government," Patrick Doyle, head of financial services practice of law firm Arnold & Porter, said.

"This is a signal that they want to do something in a joint arrangement basis. It's provocative and it's got really interesting concepts in it. We have to wait and see how the detail gets fleshed out."

(Additional reporting by Dan Wilchins)