Private Investment Capital Needed for Bailout to Achieve Stated Goals

After the President signed the Emergency Economic Stabilization Act of 2008 last Friday (10/3), the U.S Treasury Department quickly issued an RFP for outside investment managers to manage the distressed mortgage assets which will be purchased through reverse auctions. The U.S. Treasury Department has moved quickly and managers could be selected today (10/10).

Neel Kashkari was appointed the Treasury Department's point man to launch a program for buying troubled housing assets. It was interesting that the Act only allows ‘Financial Institutions’, and not independent investment managers and other RIAs, to compete for these assignments. Possibly, these other qualified firms could be selected as sub-advisors through a yet to be defined selection process. The stated goal of the Act is to limit the ultimate cost to taxpayers with even occasional talk of actually turning a profit. Efficient and effective price discovery will be at a premium for the whole-loan and the mortgage loan markets, which are particularly illiquid at this juncture.

For the Act to achieve its stated objectives for taxpayers, Private Investment Capital is required. Private equity firms and hedge funds are needed to fill the void and provide desperately needed liquidity.

However, these investors need to become comfortable with the potentially unfamiliar valuation idiosyncratic prepayment and default risks of mortgage products. Given the RTC crisis-like return potential for their limited partners, an investment in a mortgage loan valuation model consistent with arbitrage-free market conditions is a good initial trade. The winners and losers in the RTC crisis are a matter of history.

Who are going to be the private equity and hedge fund firm winners during this period of market dislocation?

Disclosure: none

Comments

[mbs pro:]

WIth the $250BN preferred stock purphase and the gov't guarantee of senior unsecured debt, the Treasury significantly aletered the Troubled Asset Relief Program (TARP). There should be less distressed sales but we will see. The urgency still exists for some of the smaller players. I agree, private capital is needed at the end of the day.

2008 Oct 14 11:32 AM