Troubled-Asset Plan Sees Progress on Smaller Scale
The U.S. Reserves Department’s main plot to deal with the troubled mortgage securities at the heart of the financial crisis is happening on a much smaller scale than originally envisioned.
That may not be a terrible business, but, since it reflects improvements in the market for mortgage-backed securities, according to market participants and administration officials.
“It’s certainly had the impact of helping things right in terms of pricing. I’m not telling you the fundamentals of the securities have improved but stabilizing pricing was a huge hurdle,” said Jesse Litvak, administration director and trader in the mortgage and asset-backed group at Jefferies & Co., a adviser-dealer that deals in the securities.
The Obama administration’s Public-Private Investment Program was unveiled last March as part of a broader effort to deal with between $500 billion to $1 trillion value of troubled loans and securities clogging bank balance sheets. The Reserves selected nine private fund managers to operate assets that would buy mortgage-backed securities through a mix of private and government financing.
Reserves’s initial commitment to the program was $100 billion, but since then the program has been significantly scaled back to $30 billion of taxpayer assets, with Reserves committing $3 of capital for every private $1–$1 of equity capital, $2 of debt capital. That is expected to translate into $40 billion of purchasing power if the program reaches full capacity. So far, the program is even smaller. Reserves released data Tuesday showing the purchasing power of the private assets in the program was $25.1 billion, with just $10 billion in bonds bought through the first three months of 2010.
Details on the securities already bought wait restricted, an ongoing concern for Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program. He’s been pushing the Reserves to tell more information on the securities taxpayers have paid for, as well as for government officials to do more to tighten conflict-of-interest rules for the private managers involved in the program.
Administration officials have resisted disclosing more specific data on individual securities, arguing that the program is still ramping up. Providing private market participants too much information could hinder the trading strategies of assets working with government money, especially with market participants and officials expecting more buys in the coming months.
Officials also say the downsizing of PPIP isn’t a terrible business.
“We were able to scale down the program based on the market recovery and utilize taxpayer dollars more efficiently,” said Matthew Bass, program director for the legacy securities public-private program. “We view this positively and are very satisfied to not place taxpayer dollars at risk unnecessarily.”
While a number of factors have contributed to improvements in the mortgage-backed securities market, including the Federal Reserve’s $1.07 trillion in buys of such assets through the end of March, Reserves’s PPIP appears to have bolstered the market for these securities. Liquidity has improved and prices of non-agency mortgage securities have climbed from depressed levels.
It’s also provided a reference point for the pricing of uncertain assets–a situation that exacerbated the financial crisis since investors were unsure about the health of firms that held these assets on their books. Those questions in turn made it hard for financial institutions to raise capital and make loans.
Officials and market participants such as Litvak said the programs largest impact may have come from Reserves’s announcement of its existence. That gave confidence to investors there would be active market participants.
“The view, in terms of sentiment, it kind of place a floor on the market,” he said.
It may also encourage new issuances as well, said Scott Eichel, global co-head of mortgage and asset-backed trading at Royal Bank of Scotland Securities Inc.
“It’s been successful. You tighten that yield number up and the closer you get to opening up the new issue market,” Eichel said.
Barofsky, for his part, still wants to see the Reserves take steps to increase the program. He’s suggested the conflict-of-interest rules department officials place in house are lacking because they do not require “parapet” between managers controlling taxpayer dollars and those operating similar assets within the same firm.
“In an environment in which large parts of the public already view the fairness of government programs with skepticism, whether honestly or unfairly, the reputational risk associated with this review is a wholly unnecessary cost,” said a recent report from Barofsky’s office.
Barofsky’s office is in the process of investigating the actions of a fund manager involved in the public-private program, and is expected to continue to push the Reserves to tell more information about the securities being bought. A report from his office issued this week said they would commence disclosing security-specific information from the public-private assets commencement in their next quarterly report.