March 23, 2009 / 9:34 PM / 11 years ago

AIG furor may have helped funds in U.S. toxic plan

NEW YORK (Reuters) - In an ironic twist, public anger about massive bonuses at bailed-out insurer American International Group may have helped big investors land a sweeter deal in the U.S. government’s latest financial rescue plan.

Managers of some major funds last week showed reluctance about joining government plans to rescue the economy on fears that Washington might retroactively change the terms of any deal including imposing limits on compensation or profits.

Those fears were prompted by fury in Congress over $165 million in bonus payments made to executives at failed insurance group AIG.

The U.S. Treasury Department spent the weekend encouraging big investors to get involved in a new, public-private investment plan which aims to soak up as much as $1 trillion worth of bad assets that are hindering banks from lending.

The bank rescue plan is a central plank of U.S. efforts to fight off recession. Under its terms announced on Monday, the government will provide incentives in terms of financing and loans to attract private capital.

Crucially, several leading money managers said they supported the plan.

“It’s clear they needed to get buy-in from the private sector,” said Sharyn O’Halloran, a political economist at Columbia University.

The White House also made it clear that it opposes any rule changes after the fact and U.S. Treasury Secretary Timothy Geithner said asset managers participating in the public-private funds will not be subject to pay curbs.


“Funds are getting a fabulous deal here, probably too fabulous,” said Robert Goldberg, adjunct professor of finance at Adelphi University and managing partner of investment advisor Maratan Partners.

Two of the largest U.S. money managers, PIMCO and BlackRock, have expressed interest in the plan.

PIMCO’s co-chief investment officer Bill Gross called it the first “win-win-win policy to be put on the table”.

“We are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer,” Gross told Reuters.

Geithner and other officials have stressed that the government was unable to buy assets on its own.

Big investors stayed away from the debut of another new Federal Reserve consumer lending program last week, raising concerns they might also turn down the public-private investment plan.

“We simply need them,” Christina Romer, head of the White House Council of Economic Advisers told Fox News Sunday, a day before the plan was announced.

“They are firms that are being the good guys here, are coming into a market that hasn’t existed to try to help us get these toxic assets off banks’ balance sheets,” Romer said.

Despite those assurances, concerns about political backlash are likely to linger, said Sung Won Sohn, professor of economics at California State University.

The Treasury will initially contribute up to $100 billion and will combine that with private capital before leveraging the total with loans from the Federal Reserve and the Federal Deposit Insurance Corp.

The terms mean potentially huge profits for funds involved. At the same time, potential losses for taxpayers could be much larger than the amount the Treasury is using to seed the program, since the FDIC and Fed are extending loans.

Geithner said creating the public-private partnerships would make it easier for banks to raise private capital, a key measure of recovery in the U.S. economy because they would be able to survive on their own.

However, he said investors had to be ready to take “some risk”.

But Paul Krugman, a Nobel prize-winning economist, wrote in a New York Times column on Monday that the plan is a “one-way bet” for investors.

“If asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work,” Krugman wrote. “It’s just an indirect, disguised way to subsidize asset purchases.”

Reporting by Kristina Cooke and Jennifer Ablan

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