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Small funds look to benefit from US Treasury's toxic asset rethink

Date: Tuesday, April 7, 2009
Author: Francesco Guerrera, Financial Times

Hedge funds and small fund companies could receive US government loans to buy troubled securities from banks after the Treasury changed the rules of its $1,000bn (679bn) toxic assets plan amid fears it would only benefit a few large investors.

The move, announced yesterday, came after lobbying by hedge funds and small investors who argued the large funds that helped shape the programme, such as BlackRock and Pimco, would be its main beneficiaries.

The Treasury's decision to amend the plan a fortnight after its creation underlines the difficulties in balancing investors' demand for speedy measures against the need to avoid rushed moves that cause problems.

The original "public-private investment programme" stated that only funds with at least $10bn of mortgage-backed assets under management could become one of the five managers in charge of buying troubled securities from banks.

But in guidance, the Treasury said it was considering "opening the programme to smaller fund managers [with less than $10bn of eligible assets under management]" after it had selected the first batch of managers.

Hedge fund managers said the changes could enable smaller groups to take advantage of cheap leverage offered by the Treasury to entice investors to buy troubled securities from banks. The authorities said they could appoint more than five fund managers in the first round and extended the application period to April 24 from April 10.

Selected fund managers will have three months to raise $500m from investors - a condition to receive government loans. The Treasury relaxed eligibility rules for the first set of fund managers.

The authorities said failure to meet one of the five original criteria, such as having headquarters in the US and having a record of managing bad assets, did not automatically disqualify an applicant. That could pave the way for foreign fund managers.

The Treasury stood firm on one of the plan's more controversial points - the ability of banks to participate as buyers of toxic assets. The loophole - reported in the Financial Times - sparked protests that banks would add to their stockpile of bad assets with cheap taxpayers' funds.

The Treasury was seeking applications from a range of institutions and would consider their "overall financial health" before approving proposals.