Bailout, Take 2: Investors want US to share risk
WASHINGTON (AP) — Investors want the Obama administration to sweeten the deal before they agree to buy risky debt from U.S. banks as part of the government's retooled program to rescue the ailing financial industry.
The administration is expected to announce Tuesday that the government's latest bailout strategy will be enticing big investors to buy more than $1 trillion in troubled assets from the banks. The hope is that, free from the drag of subprime mortgage debt and other bad investments, banks will be more likely to start lending money again and the economy will rebound.
Treasury officials, briefing Congress on the plan Monday night, suggested two approaches that the administration was considering to deal with toxic assets, according to congressional staffers who spoke on condition of anonymity before the program was announced.
These aides said the government might provide guarantees for the bad assets to establish a floor on possible losses or perhaps provide low-cost financing through the Federal Reserve for investors willing to purchase the bad assets.
President Barack Obama, speaking at a prime time news conference Monday night, promised that his overhaul of the financial rescue program would bring"transparency and oversight" to the heavily criticized program.
He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending in such areas as corporate jets.
Exactly how the administration plans to persuade hedge funds, insurance companies and private equity firms to buy into some of the world's riskiest investments remains unclear. But investors said Monday they were unlikely to buy into the idea unless the government puts up a lot of the money and promises to absorb a lot of the losses if things go badly.
"The first loss has got to be the government's," said Wall Street veteran Muriel Siebert, who runs the brokerage Muriel Siebert & Co. "Maybe the first 25 percent of losses. We don't know what's in some of those bonds."
Billionaire Wilbur Ross, who runs the private equity firm WL Ross & Co., said investors want to know how much risk the government will accept if the investments go sour, and how much money the government is willing to put up — likely in the way of low-interest loans.
"And any sort of financing is something I would be interested in," said Jeffrey Gundlach, chief investment officer of Los Angeles-based money management firm The TCW Group. "There are distressed assets that I would like to buy now but I can hardly get anyone to lend me any money in the current environment."
Treasury Secretary Timothy Geithner will unveil the program in a speech on Tuesday at the Treasury Department. The partnership with the private investors would be just one element of a major overhaul of the troubled bailout program, which has come under heavy criticism for distributing billions of dollars with few requirements on how banks would use the money.
"I want to see the incentives and the restrictions," said Jacob Benaroya, managing partner of New Jersey-based Biltmore Capital Group, a hedge fund that's buying up to $100 million in mortgage debt per year. For example, he said, he's unlikely to be interested in buying loans that must be held for 30 years.
Lawrence Summers, head of the National Economic Council, said Sunday the Obama administration had received a number of proposals on how the private sector could participate in the solution to the banking crisis.
"It can't all be private capital ... not given the size of the financial mess we have inherited," Summers said in an interview on "Fox News Sunday." But he said the administration believed the private sector could play a significant role with the right types of government guarantees.
Investors want to know more about what those guarantees will be. Stephen L. Nesbitt, whose firm Cliffwater LLC advises clients considering alternative investments, said people want returns of about 20 percent before they will buy into really risky, distressed debt.
"They need help from the government to get there," Nesbitt said. "Either by increasing the return or decreasing the risk."
The market alone is not likely to fix the problem because banks and investors don't agree on how much the assets are worth.
If a bank made $100 million in subprime loans, for instance, the face value of those mortgages is still $100 million. But investors won't buy for anywhere near that price. Some of those mortgages are so risky, they say, the value is nearly nothing. But banks are reluctant to sell for pennies on the dollar.
"Why would anyone want to buy these assets at inflated prices?" said Bill Fleckenstein, a Seattle-based hedge fund manager. "There's this argument that the banks can't sell at market prices because the market price is depressed. Well, that's what the market price is."
Lynn Tilton of the private equity firm Patriarch Partners said she wants to know what the government will consider a "bad asset" under this deal. There has to be some effort to find a real value, she said.
The Obama administration wants to find a way to get investors a good deal without bankrupting banks and adding to the economy's woes. And the government doesn't want the new plan to become a taxpayer-funded, get-rich-quick deal for investors.
"It's got to be something attractive to the private market, but on the other hand it has to be something taxpayers can live with," said Donald B. Marron, CEO of the private equity firm Lightyear Capital, who said he is interested in investing in the assets and has a team monitoring the terms of the deal.
The first $350 billion of the $700 financial bailout has been spent. And the Obama administration has said it will devote up to $100 billion of the remaining money to help fight home foreclosures.
That leaves about $250 billion to put together a deal for trillions of dollars in assets. Like so many other details in the bailout, how it will be paid for remains unclear.
Associated Press writers Alan Zibel and Daniel Wagner contributed to this report