March 20, 2009 / 10:49 PM / 11 years ago

TALF raises red flags for U.S. toxic-asset plan

NEW YORK (Reuters) - The lack of big investor interest in the debut of the Federal Reserve’s consumer lending program is heightening fears private capital will also shun the government’s toxic-asset plan amid public outrage over outsized executive bonuses.

Morning commuters drive past the Federal Reserve Bank building in Washington March 18, 2009. REUTERS/Jonathan Ernst

The Fed’s new program to resuscitate consumer credit, the Term Asset-Backed Securities Loan Facility, or TALF, received only $4.7 billion in requests for loans out of $200 billion on offer.

What’s more, big money stayed away. Applications came from just 19 hedge funds and firms that manage between $3 billion and $5 billion, fewer and smaller than expected.

The lack of investor appetite could also be a problem for the U.S. Treasury’s public-private investment fund plan, which will aim to buy up to $1 trillion in assets by leveraging taxpayer and investor capital with government loans.

More details of the plan are expected to be announced in coming days.

“If populist furor over bonuses and related issues fades in coming days, TALF may yet achieve its potential,” said Dino Kos, who ran the New York Federal Reserve Bank’s markets desk before William Dudley, now the New York Fed’s president, and is now at research firm Portales Partners.

Many big private investors are getting cold feet over the government funding plans in the wake of the public and political outrage surrounding American International Group (AIG.P), fearing that an irate U.S. Congress is more likely than ever to change the rules of engagement — possibly retroactively.

“If that furor continues to rise, TALF and for that matter, the nascent private-public investment program will prove to be white elephants,” Kos said.

On Thursday, the House overwhelmingly approved a near total tax on bonuses paid this year to employees of AIG and other firms that have accepted large amounts of federal bailout funds.

Following the vote, President Barack Obama said: “Now this legislation moves to the Senate, and I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.”

But it could send a discouraging signal to investors. One high-level private equity investor who asked not to be named said private capital was more cautious and wary about investing in the Treasury public-private investment fund because of what has unfolded with AIG.

Another private equity official said the government hasn’t consulted much with the private-equity industry. That official cited concern that details of private equity firms’ proposals and future returns could be made public.

TOO MANY STRINGS ATTACHED

The Treasury’s public-private fund is the cornerstone of the Obama administration’s plan to clear toxic mortgage assets from banks’ books, freeing them to lend again. It is expected to include about $5 in government capital for every $1 in private capital and leverage those funds with government loans, likely arranged through the Federal Deposit Insurance Corp.

The aim is to set benchmark prices for illiquid assets and jump-start a market for them, and make banks more attractive for private investment. But the plan needs investment from hedge funds and private equity firms to work.

Addressing the concern among investors that the government could slap potentially onerous restrictions on compensation and curb profits after a deal has been struck, a senior White House official concurred that it is an issue that needs to be ironed out.

“I think one of the things we do need to do is create some certainty,” said Christina Romer, head of the Council of Economic Advisers told Reuters Financial Television on Friday.

Concerns about the lack of investor interest in TALF rippled through the U.S. stock market, sending major indexes down about 2 percent on Friday.

The Dow Jones industrial average .DJI slipped 122.42 points, or 1.65 percent, to 7,278.38, while the Standard & Poor's 500 Index .SPX shed 15.50 points, or 1.98 percent, to 768.54.

“The climate is rather treacherous as investors do not necessarily trust that the government will not change the rules or create retroactive measures — particularly as it relates to clawbacks,” said Greg Peters, head of global credit strategy at Morgan Stanley in New York.

Potential investors in the public-private investment fund “worry about getting involved with the government and then having congress try to dictate how to run your business,” Peters said.

Additional reporting by David Lawder and Megan Davies; Editing by Leslie Adler

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