PPIP Update: Asset Managers Next Week

Next week we’ll get some more news about the Public-Private Investment Program (PPIP). Specifically, the Treasury Department will announce on Wednesday who it plans to accept as the asset managers for the PPIP, the government initiative designed to clear toxic legacy assets from bank balance sheets. Right now, many banks are still struggling under the weight of bad debt that is tying up their capital or requiring them to go out and get more cash to meet reserve requirements.

PPIP will work through an auction process that will allow private investors, such as mutual funds and pensions, to bid to buy assets or pools of assets as designated by the banks through asset managers, widely expected to include megamanagers BlackRock Inc. and Allianz SE’s Pacific Investment Management Co.

The asset managers will need to have on hand at least $500 million in capital by September to invest in the legacy assets–largely residential and commercial mortgages. This money will come from private investors who want to take on some risk in purchasing the assets from banks in expectation of a return in the future when these mortgages or companies regain their value. Each managed fund will be structured differently based on the manager who will work with Treasury for approval. These approved fund structures should be ready in June, giving investors time to weigh options for how they want to invest.

As I have mentioned on this blog before, the biggest problem facing PPIP is that it still leaves the taxpayer with most of the risk. One of the main goals of public-private partnerships in general is to transfer risk to the private sector that is making the investment choice. PPIP doesn’t do this well.

Read more about PPIP and how it works in my March 27 article, Rolling Out TARP II.