Doubts over the willingness of banks to offload the troubled assets at potentially loss-making prices has fueled skepticism over the Treasury's plan to partner with private investors to buy distressed assets and may have contributed to the plan's recent downsizing.
But managers hired for the Public-Private Investment Plan (PPIP), as well as others raising money for distressed assets, insist there is no shortage of cheap securities on the market with the economy in recession and real estate prices falling.
"There's a lot of assets out there and there's a lot of different entities that have to sell," said Donald Ramon, chief financial officer of Invesco Mortgage Capital, a real estate investment trust that will earmark some of its $200 million in the program through Invesco, one of the nine PPIP mandates.
The managers hired by Treasury -- including Invesco's WL Ross & Co -- must raise at least $500 million each for the PPIP, which will be matched with Treasury money to buy distressed residential and commerical mortgage assets that investors are undervalued.
Mortgage bond prices have already been buoyed as markets have anticipated the advent of the PPIP and the expansion of the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) to residential mortgage securities.
But there is still a question of whether the managers of the Treasury's PPIP can raise enough money and spend enough to provide a floor for the $3 trillion markets. The bonds and their derivatives led the financial crisis as house prices started to fall in late 2006, exposing weak underwriting.
The U.S. residential real estate crisis has turned into the worst since the Great Depression with defaults and foreclosures hitting records. It is now spreading to commercial property, adding angst to banks crippled by write-downs.
LESS NEED FOR PROGRAM NOW
Treasury officials this week conceded that PPIP is a scaled back version of what was envisioned before the financial markets steadied this year.
Analysts said there is less need for the program as financial institutions have shored up capital, and as easier accounting rules will discourage banks from selling billions of dollars in assets still valued above market levels.
"There were naysayers about TALF, and we were early in TALF, and that did very well," said Wilbur Ross, chairman and chief executive officer of WL Ross, which has already committed $500 million to PPIP, and will get more from Invesco's REIT. "We have every expectation that the PPIP will do well."
Purchases are likely from banks that are being taken over by the Federal Deposit Insurance Corp.(FDIC), said managers of Real Estate Investment Trusts (REITs) and the PPIP managers. Wall Street dealers that have acquired toxic assets in recent months may also sell to book profits, Invesco's Ramon said.
The supply of toxic assets from willing sellers should grow as the economic recession and prolonged housing slump continues to weigh on the financial institutions and assets, according to Invesco, and Marathon Asset Management, another of the PPIP managers that plans to raise $1.1 billion. Additional write downs would open banks up to PPIP sales.
U.S. bank failures are on the rise, with 77 banks representing $409 billion in assets upended in 2008 and so far this year. Marathon expects that number may grow as high as 1,000, according to its slide presentation to investors on Thursday, obtained by Reuters.
Write-downs of assets at existing banks of $1.5 trillion as of June 30 are seen surpassing $2 trillion, Marathon estimated. This may hold the key to success of PPIP, since banks that hold bonds at face value, and not market levels, will refrain from selling because they would recognize a loss.
"I have heard more confidence in the program from the investors than from the banks," said Scott Buchta, a strategist at Guggenheim Capital Markets in Chicago.
"The only way the big banks will sell is if someone makes them," said Sue Allon, chief executive officer of Allonhill, a mortgage consulting firm in Denver, Colorado. "I don't think there's any market incentive. They have enough capital."
REITs including Invesco and Two Harbors Investment Corp. also cited an open playing field given the losses suffered by investors over the past two years. Many dealers have also cut back on proprietary trading, and mortgage giants Fannie Mae and Freddie Mac have stopped buying after accumulating more than $200 billion during the housing boom.
"The question is (if) the government will get Fannie and Freddie to start selling," Invesco's Ramon said.
Other investors are lining up to take advantage of PPIP and TALF funding. Following Invesco, a Western Asset Management Co. REIT in June filed for an initial public offering, noting it anticipated PPIP financing on Treasury's approval of WAMCO.
PPIP "was the right move for the government to make," said investor Ross. "Time will tell if the naysayers are right but I'll bet them a good steak dinner that they are wrong."
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