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June 18, 2009 01:00 AM

BlackRock, PIMCO seen on short list for PPIP

But red tape may lead some managers to opt out, observers say

David Hoffman
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    BlackRock Inc., Franklin Templeton Investments, Invesco Ltd., Pacific Investment Management Co. LLC and Western Asset Management Co. are among the leading candidates to run funds for the Legacy Securities portion of the government’s Public-Private Investment Program, according to observers.

    But some industry watchers said that though many firms may have expressed interest in the program initially, some could be having second thoughts now.

    “Based on my own experience to date, asset managers have an interest in the program, but I’m not sure how many have said they will go forward with it,” said Barry Barbash, a partner in the Washington office of New York law firm Willkie Farr & Gallagher LLP. He is a former director of the Securities and Exchange Commission’s Division of Investment Management.

    “The degree of red tape and intrusive regulation is a stumbling block,” Mr. Barbash said.

    Judging by the amount of interest expressed by asset managers in PPIP, it appears at least initially not to be much of a worry.

    The Department of the Treasury on April 29 announced the receipt of more than 100 applications from potential fund managers interested in participating in the Legacy Securities portion of PPIP.

    Under the Legacy Securities program, institutional investors that have $10 billion of comparable assets will purchase pools of mortgage-backed and mortgage-related securities from banks and other financial institutions.

    The program is potentially appealing to asset managers because they would be able to put together products — most likely closed-end funds, hedge funds and private-equity funds, and to a smaller extent, mutual funds — that have the potential to deliver huge returns.

    Once a fund manager is pre-qualified, it can begin raising the expected minimum of $500 million in private capital that would serve as the investment that, pending further approval, would be matched with taxpayer funds.

    Fund managers may then choose to use leverage pursuant to the Legacy Term Asset-Backed Securities Loan Facility.

    Several high-profile individuals at the firms have made clear their interest in the program.

    Bill Gross, co-chief investment manager at PIMCO of Newport Beach, Calif., has been particularly vocal about his support of PPIP, calling it a “win-win-win” policy.

    Laurence Fink, chairman and chief executive of New York-based BlackRock, has also been a staunch supporter of the program, and so has Martin L. Flanagan, president and chief executive of Invesco in Atlanta.

    “We strongly believe that [PPIP] will help stimulate the mortgage market and provide individual and institutional investors globally with compelling investment opportunities in the Legacy Securities and Legacy Loan programs,” Mr. Flanagan said in an April 27 statement.

    The Legacy Loan program calls for banks to sell pools of residential mortgages to individuals and institutions through the Federal Deposit Insurance Corp.

    That part of PPIP appears to be on hold, partly as a result of banks’ reluctance to take part out of concern that they wouldn’t be getting what the loans were worth, attorneys familiar with PPIP said.

    ?Pricing problem?

    There are similar concerns, however, over the Legacy Securities program.

    “It’s always been a pricing problem,” said Donald G. Ogilvie, independent chairman of the Center for Banking Solutions at Deloitte LLP of New York. “The people that own these assets think their value is higher than the people that want to buy them.”

    As a result, there are a number of potential buyers but few sellers, Mr. Ogilvie said.

    Even the buyers, however, may be getting cold feet, according to several securities attorneys.

    After asset managers applied to run PPIP funds, President Obama signed into law the Helping Families Save their Homes Act of 2009, which was aimed principally at stemming home loan foreclosures.

    But the act also has various provisions related to PPIP participants.

    Among other facets, the act requires consultation with the special inspector general for the Troubled Asset Relief Program to impose strict conflict-of-interest rules on PPIP fund managers; allows the special inspector general access to all PPIP fund books and records, including all records of financial transactions in machine-readable form; and requires each fund manager to acknowledge, in writing, a fiduciary duty to both the public and private investors in a PPIP fund.

    “I don’t think it’s going to stop the program,” said Jeff Taft, a Washington-based partner with Mayer Brown LLP of Chicago.

    But the new rules and regulations could prove to be a “speed bump” warning some asset managers of the difficulties of doing business with the government, he said.

    None of the asset managers that are potential Legacy Securities program participants would comment on the problems that they could face as a PPIP fund manager.

    Firms under consideration are in a “quiet period” until the Treasury Department announces the names of the asset managers it selects, said one company spokeswoman, who asked that neither she nor her firm be identified.

    She did express skepticism, however, about the notion that asset managers who have expressed interest in managing funds for PPIP are thinking twice about it.

    “A lot of naysayers are stirring a big pot of what-ifs,” the spokeswoman said.

    Fund watchers, however, said that asset managers should be asking themselves if it is a good idea to get in bed with the government.

    “A lot of financial firms have been shocked by what they thought was a good thing,” said Reuben Gregg Brewer, director of mutual fund research at Value Line Inc. of New York.

    New York-based JPMorgan Chase & Co. is one of those firms.

    During the company’s first-quarter earnings call in April, James Dimon, the firm’s chairman, president and chief executive, said: “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that.”

    JPMorgan Chase received $25 billion from TARP last year — money that comes with strings attached concerning issues such as compensation.

    In terms of PPIP, Mr. Dimon said that JPMorgan Chase would participate neither as either a buyer nor a seller of the mortgage-backed securities.

    A potential buyer has reason to be leery of participating in PPIP for another reason: bad public relations.

    “If you do participate and you do well, will you be chastised?” Steve Kandarian, chief investment officer of MetLife Inc. of New York, reportedly said this month at a conference, referring to the potential image problem of a fund manager’s making a killing on toxic assets.

    David Hoffman is a reporter at InvestmentNews, a sister publication of Pensions & Investments

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