"U.S. Rounding Up Investors to Buy Bad Assets
WASHINGTON — Obama administration officials worked Sunday to persuade reluctant private investors to buy as much as $1 trillion in troubled mortgages and related assets from banks, with government help.
The talks came a day before the Treasury secretary, Timothy F. Geithner, planned to unveil the details of the administration’s long-awaited plan to purchase troubled assets, meant to remove them from the balance sheets of banks and, in turn, spur banks to lend more money to consumers and companies.
The plan relies on private investors to team up with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.
As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.
But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.
Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.
A spokeswoman for the Treasury declined to comment on the conversations over the weekend.
Administration officials took to the airwaves Sunday to reassure investors that the public would distinguish between companies like A.I.G., which are taking government bailout money, and private investment groups that, under this latest plan, would be helping the government take troubled assets off the books of some of the country’s biggest banks.
“What we’re talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks’ balance sheets,” Christina D. Romer, the White House’s chief economist, said in an interview on “Fox News Sunday.”
“I think they understand that the president realizes they’re in a different category,” she said, adding, “They are firms that are being the good guys here.”
Last week, the House passed a bill that would impose a 90 percent tax on bonuses paid since Jan. 1 by companies that owe the government at least $5 billion in bailout loans. This week, the administration is planning to call for increased oversight of executive pay at all banks and Wall Street firms.
Private equity firms and hedge funds have historically been only lightly regulated and have not been subjected to the same disclosure requirements that are applied to banks and trading companies.
Mr. Geithner faces a highly charged and politicized audience when he introduces the troubled-assets plan on Monday, after a week filled with vitriolic attacks over his handling of A.I.G. bonus payments.
Given that private equity firms, hedge funds and sovereign wealth funds( NB DON ) are perhaps the only institutions with cash to invest in such a program, the administration went on the offensive on Sunday in an effort to win them over.
In phone conversations, the administration gave some of these prospective investors a preview of the program, the people briefed on the conversations said.
Three chiefs of investment firms said in interviews that they were impressed with the terms of the program — which would have the government lend nearly 95 percent of the money for any investment — but remained reluctant to participate because of the potential for future regulation.
“The deal is good, but it’s not worth it if I’m buying myself into a retroactive tax or a Congressional hearing,” the chief executive of a major investment firm said, insisting on anonymity because he did not want to seem at odds with the Treasury Department in the event that his firm ends up participating.
Despite the reluctance of some investors, others voiced optimism about the plan. Laurence D. Fink, chief executive of BlackRock, a money management company, said his firm planned to participate in the program.
“We will be raising money on behalf of our clients,” he said, adding that he was not worried about government intervening in his business. “I don’t see how Congress can interfere in this.”
Pimco, a large bond fund, also was expected to participate.
Still, a big stumbling block remained: how to place a value on mortgage-related assets that have not been traded for months.
Executives briefed on the plan said it did not address the central question of how to bridge the divide between what the banks want to sell the assets for and what investors are willing to pay for them. The government hopes that the subsidies it provides to investors are so rich that they will be willing to risk overpaying somewhat for the assets.( NB DON )
The White House plan is designed to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy as many toxic assets as possible and free the banks to resume more normal lending.
Austan Goolsbee, staff director of the president’s Economic Recovery Advisory Board, said on Sunday that his discussions with private investors led him to believe that they would participate.
“What we have seen in our discussions with people is that if you lay out clear rules that are responsible, people want to participate if there’s a business reason to participate,” Mr. Goolsbee said on CBS’s “Face the Nation.”
“In this circumstance, where we’re trying to encourage the private sector to participate, that’s going to be treated totally differently than companies like A.I.G. or Fannie Mae, where they are only in business because the government saved them,” he said.
At least one administration official also seemed to signal that the 90 percent tax on bonuses passed by the House might not become law.
Vice President Joseph R. Biden’s senior economic adviser, Jared Bernstein, said on “This Week” on ABC that he thought President Obama might be concerned about “using the tax code to surgically punish a small group of people.”