March 27, 2009 / 1:10 PM / 10 years ago

Wall Street backlash could spread with U.S. bank plan

NEW YORK (Reuters) - The potential for private investors to reap billions of dollars in profits from the U.S. government’s bank bailout plan could trigger another wave of public outrage, like that seen after the payments of bonuses to AIG staff, and it might slow any economic recovery.

The Obama administration is scrambling to woo top bankers, financiers and money managers like BlackRock and PIMCO to back its latest bank bailout plan.

But private investors making it rich are unlikely to avoid criticism against a backdrop of mounting job losses and a deteriorating economy.

“Just looking at the current political climate and populist climate,” Alex Ehrlich, head of global prime services at UBS UBSN.VX (UBS.N), said at the Reuters Private Equity and Hedge Funds Summit in New York this week.

“You would have to ask what does the public say about the first hedge fund that is reported to make $1 billion or $2 billion in profit off the back of a public-private investment partnership?” he said.

U.S. Treasury Secretary Timothy Geithner plans to create public-private partnership to take up to $1 trillion of troubled assets off banks’ books and unfreeze credit markets.

The plan represents the centerpiece of the Obama administration’s attempts to tackle the worst banking crisis since the Depression and the resulting global economic slump.

A repeat of the outrage seen last week over the planned $165 million bonuses for executives at AIG, the insurer which was bailed out three times using taxpayers money, could set back Washington’s attempts to gain momentum in its effort to pull the U.S. economy out of recession.

“That was such a waste of time with AIG and distracts from getting us out of this mess and onto a recovery,” said Tom Sowanick, chief investment officer at Clearbrook Financial, with $22 billion under management.

Money managers drawn by the public-private investment plan acknowledge the potential for more furor.

Bill Gross, the founder and co-chief investment officer at Pacific Investment Management Co., or PIMCO, told Reuters there could be another backlash against Wall Street but it will be “mitigated, to some extent, by profit-sharing.”

“Still the Obama approach is to use the private system as opposed to the Krugman/Roubini philosophy of nationalization and confiscation. I prefer the former — along with the rotten tomatoes,” Gross said.

Paul Krugman, a Nobel prize-winning economist, in a New York Times column on Monday slammed the Geithner plan, saying it was a “one-way bet” for private capital. “It’s just an indirect, disguised way to subsidize asset purchases.” he said.

He isn’t alone in his view. Nouriel Roubini, one of the few economists who foretold much of the current financial turmoil, has said nationalization or receivership of a bank should seriously be considered.


Under Geithner’s toxic-asset plan, the Treasury will initially hire five investment managers to raise capital with a dollar-for-dollar public match. The government and private investors would share equally in gains and losses from the program.

BlackRock’s Curtis Arledge, whose firm intends to take part in the Treasury’s public-private investment plan, said the plan is a win-win for public and private capital.

“When we raise $1 billion of money for private investors, it’s not our money that we are investing,” Arledge, co-head of U.S. fixed-income, said in an interview. BlackRock might invest some of its own money in the public-private investment fund, but “it is not the bulk of the fund,” he added.

“Our private investors, in many cases, are teachers, firemen, policemen through pension funds,” Arledge said.

Applicants for these investment management positions must be U.S.-based firms able to demonstrate they can raise at least $500 million in private capital and have at least $10 billion in eligible assets under management.

“Pension funds and endowments are some of the private investors we raise money from, so I think the image of private investor needs to be reformulated to actually who those people are,” Arledge said.


An unprecedented outburst of anger against Wall Street came last week over $165 million in bonus payments made to executives at failed insurance group AIG, raising the risks for private capital firms thinking about partnering with the Treasury. Many have expressed reservations regarding retroactive curbs on compensation and profits.

But those concerns have cooled.

Monday, the New York State attorney general, Andrew Cuomo, said he had already won commitments from AIG employees to pay back $50 million out of the $165 million awarded in February.

Additionally, Congressional legislation to clamp down on companies receiving financial bailout money by severely taxing bonus payments now appears certain not to come up in the Senate until after a two-week recess that begins April 3.

“What’s different this time around is that Joe Six Pack can invest in these funds,” said Sowanick of Clearbrook Financial. “I think another eruption of public anger could come, but as I said, everyone should think about this carefully as everyone will share in the profits.”

Additional reporting by Christian Plumb

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