U.S. Treasury seen launching first toxic funds

WASHINGTON, Sept 30 (Reuters) - The U.S. Treasury is expected to announce approval later on Wednesday for the first of its public-private investment funds to buy toxic assets from banks, people familiar with the matter said.

The U.S. Treasury's chief of its Troubled Asset Relief Program, Herbert Allison, last week promised lawmakers that the first "closings" for the nine funds in the up to $40 billion program would take place by the end of the month.

That means that the closed funds would have raised a minimum of $500 million in private capital, received dollar-for-dollar matching funds from the Treasury and are approved to begin purchasing assets.

The Treasury's plans to take toxic assets off of bank balance sheets -- once the top priority for the $700 billion TARP fund -- have diminished as the Treasury's direct capital injection programs have bolstered market confidence.

An ambitious plan announced in March to form public-private investment partnerships (PPIP) to purchase up to $1 trillion in toxic mortgage securities and whole loans was scaled back over the summer to just $40 billion, with about $30 billion of that coming from taxpayers.

In July, the Treasury named nine fund managers to run the partnerships for securities purchases. A parallel program run by the FDIC to auction whole loans to investors has been put on hold.

Eurasia Group analyst Sean West said in a research note that up to six of the nine managers chosen are likely to prove they have raised the minimum amount necessary to begin purchases. The funds have a deadline of October 8 to raise the money.

He said it was good news for banks and distressed asset markets that the Treasury is proceeding with the program in the face of Congressional calls to scrap it to reduce the growing fiscal deficit.

Treasury is "more concerned with implementing programs that it believes can ultimately improve bank balance sheets and restore the normal flow of credit in the economy," wrote West, who is based in Washington. "However, some investors are concerned that that the program is too small, while others are skeptical that banks are actually willing to sell these assets."

The nine managers chosen to launch fundraising efforts in July were Alliance Bernstein LP, Angelo Gordon &Co. L.P. with GE Capital Real Estate, BlackRock Inc. (BLK, US), Invesco Ltd., Marathon Asset Management L.P., Oaktree Capital Management L.P., RLJ. Western Asset Management L.P., TCW Group Inc., and Wellington Management Company LLP.

The Treasury chose the nine investors from a group of 100 potential participants.

The successful funds will have the option to choose between 100 percent leverage directly from Treasury with no additional leverage allowed, or to take 50 percent leverage from Treasury with the option to borrow from the Federal Reserve's Term Asset-backed Securities Loan Facility (TALF) or from private sources. (Reporting by David Lawder)