Banks still stuck with the junk

Beset by delays, the government's program for ridding banks of bad assets is finally poised to take off. But problems still plague the controversial program.

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By David Ellis, staff writer

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NEW YORK ( -- The nation's banks are still sitting on tens of billions of toxic assets -- and they likely will be for quite a while.

The main problem: Tepid interest in a government program designed to cleanse banks' books, which became clogged with subprime mortgages sold at the height of the credit bubble.

The aim of the Public-Private Investment Program, announced by the Treasury Department in March, is to create a market so banks can find buyers for the toxic assets.

To kick start it, the government pledged to match money from private investors and also offered low-cost federal financing.

But many would-be participants such as pension funds, endowments and foundations have balked at jumping in.

For example, CalPERS, California's pension fund for public sector workers and one of the world's largest funds, has so far decided not to invest in PPIP. A company spokesman said the program's "risk/return" was not "the best."

That lack of interest, as a result, has complicated fundraising efforts. Four of the nine asset managers selected to run the program missed a Sept. 30 deadline to raise $500 million in private money.

"That is the problem," said Joshua Rosner, managing director at the independent research firm Graham Fisher & Co. "They are having a hard time raising the money."

At the same time, banks have expressed little interest in selling their cruddy assets, notes Mark Tenhundfeld, a senior vice president at the American Bankers Association in Washington.

"I hope there are sellers out there," said Tenhundfeld. "I just haven't seen any evidence that there is."

Buoyed by raising billions of dollars in fresh capital in recent months, some lenders may instead opt to hold onto their troubled assets rather than sell them and record losses.

Of course, improved values of some of these securities hasn't hurt either. Signs that the U.S. housing market may have bottomed have helped push up the value of complex mortgage securities.

Stabilizing real estate values, however, have also tempered investors' expectations for the types of returns they might see.

Earlier this year, PPIP players could have anticipated yields in excess of 20%. Now, a more realistic return might be somewhere in the neighborhood 8% to 12%, notes Rosner.

"With those kinds of returns and potential lockups on the money, that doesn't provide a terrifically attractive return relative to other asset classes," he said.

Other concerns keep participants at bay

Potential investors are also troubled that lawmakers or regulators could retroactively alter the terms of PPIP.

Last spring, for example, potential asset managers and investors in PPIP feared that the government would impose executive pay limits on participants. Those concerns, however, were allayed when regulators unveiled the terms of the program.

Nevertheless, many would-be investors remain leery about how the government may react if investors were to capture outsized returns using taxpayer money.

With the money raised so far, the program will have up to $12.3 billion in purchasing power of troubled assets. It is expected to expand to $40 billion, including money ponied up by private investors.

And while the terms of the program have scared away some investors, the sheer complexity of the assets has spooked other would-be participants, notes Eric Petroff, the director of research at Wurts & Associates, a Seattle-based consultancy that advises large institutional investors.

Right now, only commercial mortgage-backed securities and certain residential mortgage-backed securities issued before 2009 and originally considered AAA-rated qualify to be sold into the program.

But beneath such securities are layers and layers of investments, pegged to various pools of mortgages, which has made some speculators think twice.

"As a fiduciary, are you really going to want to jump into this?" said Petroff. To top of page

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