Thursday, March 19, 2009

Another View On The Public-Private Investment Fund

On occasion, Zero Hedge has discussed the utility of such programs as the TALF and the Public-Private Investment Fund, all core components of the Financial Stability Plan, which, when first presented by Tim Geithner in Feruary, shocked the capital markets with its alleged insufficiency and opacity.

Here we present the view of Gorelick Brothers Capital, a fund investor, who in their most recent market update notes that it has "reviewed over 140 new fund proposals, mostly from hedge funds, private equity and other money managers. These funds have targeted approximately $70 billion in new capital and have been able to raise about $35 billion to date. This tally excludes private equity firms investing chiefly in commercial real estate loans and equity, as well as distressed debt funds focused on corporate bonds and loans. In the face of overwhelming supply, $35 billion of fresh capital has hardly made a dent in the opportunity."

The report is an interesting insider's perspective of what potential role the TALF and PPIF might serve for any pent up capital demand, and how it may make lives for Fund of Funds somewhat easier, although it is not explicitly clear to Zero Hedge if the TALF will indirectly subsidize FOF capital for investments in asset managers who intend to use the PPIF as an investment vehicle.

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Anonymous said...

I've got a view for you about the demand of mortgages.

The gigs up! Everybody is on to the hussle. Nobody except for the most complete idiots are buying. If you're a bank are you eagar to load to this crowd? Maybe not....

The Feds plan will not work.

Once bitten, twice shy.

Anonymous said...

thank you kindly for the post!

Anonymous said...

what i fundamentally don't understand is the straight arithmetic:

bad loans were made, at least $2T, maybe $4T
bank capital was less than that
so someone has to take the loss outside the banks

this plan (if i understand it) puts private investors in a first loss position for some haircut amount & then the fed. presumably, private investors are expecting to make money on this.

so, where does the loss go?

Tyler Durden said...


Anonymous said...

T - thanks just LOL @ your response.

If the average taxpayer can wrap their head around this concept, perhaps the populist revolt will really come alive. said...

How would I play the Treasury’s Public Private Partnership to buy assets?

Let me count the ways…

To recap, Geither proposes that the Treasury will contribute, say 70%-90% of the funding required such toxic bank assets as long as unnamed hedge funds and private equity funds put in the remainder. Any loss that occurs would come out of the fund’s equity portion, before affecting the Treasury contribution.

Face value

This structure is essentially equivalent to having private investors contribute equity capital in a bank and having the government provide the deposits and unsecured debt. This would form the liability side of the balance sheet, and then the new shareholders would be incentivized to go out and buy bank assets. The key problem that this structure is supposed to resolve is that of price discovery: the private investors would have the incentive to price assets correctly in order not to lose their shirts.

As Mr. Geithner already knows from the AIG bailout, the devil is in the details, so here is an early preview of what could go wrong. Private investors will make a simple evaluation: Can I buy this toxic asset from a distressed bank, such that after whatever defaults may occur in the future, I will make a profit?


The first thing I would do it cherry pick. I would go over a bank’s book, and wherever they have undervalued assets i.e. assets they have marked down already, but I think has a greater chance of recovery than they do, I would buy. This would load up the PPP bank with the higher quality assets, and leave the banks with lower quality assets. In return, the distressed banks will realize a profit because they sold the asset for a higher price than the mark.

Ring Fencing

The next thing I would do is ring fence, or play the odds. This is actually a typical private equity trick. Let’s say I have a 100 million dollars. I split that into ten vehicles, and have the Treasure give me 10:1 leverage on each vehicle. I have a billion dollars of firepower in 10 vehicles. I then make absolute punts with each vehicle, going for broke, buying stuff that no one else will buy. If each vehicle buys an asset at 30 cents on the dollar, and just one of the vehicles manages full recovery and all the others go bust, then for that one vehicle:

10mm equity+90mm debt = 100mm assets

after recovery

333mm assets = 90mm debt + 10mm interest + 233mm equity

My return on 10mm would be 2330% and on 100mm would 233%.

Most real banks are prevented from doing this because the Fed and FDIC has restrictions about how much risk they can take on the book, but the PPP vehicles will not.

My ring fence strategy would probably lose the Treasury a butt load of money, because they will lose money on all the other nine vehicles and won’t have recourse to my profitable tenth.