Bond firms back Treasury program; hedge funds balk

Date: Tuesday, March 24, 2009
Author: Christine Williamson, Douglas Appell and Arleen Jacobius, PI online.com

Some managers say they’re gung-ho about participating in the U.S. Treasury’s $1 trillion Public-Private Investment Program, although some hedge fund managers are giving it less than rave reviews.

Fixed-income managers said the program’s terms make it attractive for them. William Gross, PIMCO’s high-profile co-CIO, says he’s eager to participate, lured by the prospect of garnering double-digit returns for clients while helping to revive credit markets and aiding U.S. taxpayers, a PIMCO spokesman said.

Curtis Arledge, co-head of U.S. fixed income at BlackRock, said even though some details remain to be worked out, the Treasury program should improve the balance of risks and returns in the market sufficiently to attract a much broader array of investors — “bringing capital into markets that don’t have enough capital.”

BlackRock was already willing to buy assets on an unleveraged basis to gain an internal rate of return for clients of 7% or more, but the financing available under the program raises the prospects of far higher returns. “We are very eager to participate,” he said.

Treasury Secretary Timothy Geithner said the program will also be open for pension funds to participate, and the $114 billion California State Teachers’ Retirement System, Sacramento, is ready to take part.

”We are ideally situated to take advantage of these types of opportunities. CalSTRS doesn’t need to ’gear up’ to review this newly announced program. We already have policies, staff and procedures in place to take advantage of opportunities that may arise, such as this,” said spokesman Ricardo Duran. “CalSTRS will look at whatever this program has to offer and determine if it fits our equity return strategy, to buy solid securities from distressed sellers, which our board approved (earlier this month).”

Others remained a bit more tentative.

Executives at the Blackstone Group are “studying the details” of Mr. Geithner’s proposal, said Steve Rose, spokesman for the private equity firm.

The $167.3 billion California Public Employees’ Retirement System, Sacramento, also is looking at the details of the program. “CalPERS isn't commenting at this time, at least until we have more information,” spokesman Clark McKinley wrote in an e-mail answer to questions.

“It’s a terrible plan,” said hedge fund manager Igor Lotsvin, co-founder and managing director of Soma Asset Management. “It’s basically a rehash of (former Treasury Secretary Henry) Paulson’s `bad banks’ plan from last year, and it’s just not going to work.”

Mr. Lotsvin said there are three huge problems with the Treasury program.

One is that “the assumption is that there are good assets on the books of the banks that are merely frozen because of liquidity constraints. That’s just not true. These are toxic assets. Giving banks a liquidity infusion is not going to help them because someone else is going to have to buy that toxic inventory. It’s not clear that someone will want to buy them,” Mr. Lotsvin said.

The second problem is that Treasury officials assume that the size and number of toxic assets is fixed, “but it’s not a static number,” he said, given that both mortgage defaults and credit delinquency likely will increase sharply in coming months given the high number of job layoffs across the U.S.

Finally, Mr. Lotsvin said there is not enough capacity among likely buyers, because many distressed hedge funds are “under massive redemption pressure because they had poor returns last year after getting into distressed (securities) too early and subsequently getting creamed.”

Mr. Lotsvin said “there is a gigantic glut of distressed debt available right now. The world is for sale on margin right now at unbelievable prices. There aren’t many reasons why you’d need to buy distressed securities from the federal government.”

Hedge fund manager James L. Melcher, president and managing director of Balestra Capital, said his analysis of the program didn’t persuade him to consider investment.

“These are very illiquid investments, and I don’t like illiquid assets. There’s a lot of risk in the plan,” Mr. Melcher said. Even if the plan is successful, he said, “it’s very questionable about how big the profits will be and if there are profits, whether the government will allow you to keep them all.”

In a news release today, the Securities Industry and Financial Markets Association applauded the Treasury program but called on policymakers to “clearly outline all terms that will apply to participants going forward” to ensure broad investor participation.

Contact Christine Williamson at cwilliamson@pionline.com, Douglas Appell at dappell@pionline.com, and Arleen Jacobius at ajacobius@pionline.com