PPIP: Strong Opinions From Investors
The much anticipated Public-Private Investment Program (PPIP) announced by the Treasury Department in March recently charged nine financial firms with helping banks rid themselves of toxic residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). Each of these firms will buy banks’ troubled assets by raising at least $500 million over the next few months, an amount the Treasury will match with taxpayer money. In addition, the FDIC will make non-recourse loans to these firms. They will be able to borrow up to six times the equity investment, allowing them the opportunity to manage several billion dollars by the fourth quarter. Their first move will be to snap up one-time AAA-rated bonds that are now selling at a deep discount.
With an applicant pool of more than 100, the government’s selection of these nine firms serves as a stamp of approval on their ability to raise capital in such a difficult environment, something that is critical to the program’s success. In talking with institutional and private investors, BHA analysts have witnessed strong opinions both for and against this program.
Investors in opposition to the program have expressed concerns over a variety of issues. First, PIMCO’s withdrawal of its application, which received much publicity during the past few weeks, has left some questioning why such a well-respected firm would remove itself from consideration. Second, many large endowments and other institutional investors that normally would invest in such funds are suffering because they overcommitted to private equity investments. Liquidity has become paramount for them; however, liquidity will not be found in PPIP. Finally, and two of the largest concerns voiced by investors; the extent to which the government may change the “rules” and if banks are even willing to sell these assets on the heels of a strong first quarter.
On the other side of the coin, BHA analysts have heard from a number of investors that are researching the program. The category of investors that will conduct the bulk of this research is larger investment consultants that serve in a fiduciary role to pension funds, endowments, foundations, and other tax-exempt organizations. A managing director at a large west coast consulting firm noted that he has had many clients inquire about the program and, as a result, he is actively gathering information in order to make specific recommendations. In addition, a chief investment officer at a large U.S. government pension plan expressed interest in the program, and understands the time constraints involved with making such a decision. The plan’s investment committee recently met to discuss PPIP along with other asset allocation moves.
In the end, PPIP is not for everyone. Investor responses have been mixed and perhaps slightly skewed towards non-interest due to the number of questions that have yet to be answered. However, investors with a long-term outlook and a willingness to partner with the government in a recovery effort may have the opportunity to reap the rewards.