Private capital may not be on board for bank bailout

By Paritosh Bansal and Jennifer Ablan

NEW YORK (Reuters) - The U.S. government may find buyout firms, hedge funds and other private investors reluctant to help it cleanse banks of toxic assets, hampering efforts to jumpstart the economy.

Private investors say they are waiting for the details of an Obama administration plan, to be unveiled on Tuesday, that is expected to include buying troubled assets from banks. But they worry about how the assets would be priced and what guarantees they would get against potential losses.

A further concern for investors is likely to be the government's track record on how it handled the first round of the $700 billion rescue for the industry, when it imposed restrictions on such things as dividends and compensation on banks that received taxpayer money.

"The aggregator bank is the right idea," said Whitney Tilson, founder of hedge fund T2 Partners LLC, referring to the plan to create a so-called 'bad bank' as a way to take toxic assets off the books. Even so, "the question is how do the assets get into the aggregator bank and right now investors are wondering is this (plan) going to be the same."

To lure in private investors, the bad bank could be allowed to issue debt backed by the Federal Deposit Insurance Corp, a source familiar with the Obama administration's thinking told Reuters.

Overall estimates of the amount of assets a bad bank would have to buy have run to more than a trillion dollars and the government is counting on private capital to help revive the economy from its deepest slump in decades.

Treasury Secretary Timothy Geithner is looking for ways to use taxpayer funds to attract private investors, White House National Economic Council Director Lawrence Summers told Fox News television on Sunday. But private capital could come at a cost to taxpayers.

"With the model under discussion now, the government is taking all of the downside beyond the initial payment that private investors made, while the investors get all of the upside," said Dan Alpert, managing director and investment banker at boutique bank Westwood Capital.

PRICE IS RIGHT?

Banks want the government to buy distressed assets, but the administration has struggled with pricing the assets in a way that helps the banks while being fair to taxpayers.

"If the prices are deemed too high, then the private sector will not bid aggressively for the assets and will show only a modest interest -- in essence to wave the flag," said Tom Sowanick, chief investment officer for $22 billion in assets at Clearbrook Financial LLC.

The government could sweeten the deal by providing guarantees that protect investors from losses and help in determining the price of those assets. But if guarantees are set too high, taxpayers could lose out and if they are too low, investors might not bite.

"It's such a black hole right now. Nobody knows how to price these toxic assets," said Paul Homsy, a principal at Crescent Asset Management. "If they put a floor on these assets, it might be something attractive."

The government may also have to consider further incentives such as providing financing when private firms cannot easily get debt elsewhere.

In July, Merrill Lynch agreed to sell $30.6 billion of collateralized debt obligations to buyout firm Lone Star for $6.7 billion, or about 22 cents on the dollar. But the investment bank, which is now part of Bank of America Corp (BAC.N), also agreed to finance about 75 percent of the purchase price.