WASHINGTON (Reuters) - The Treasury Department's program to soak up toxic mortgage assets may have unnecessarily excluded smaller, well-qualified fund managers to the detriment of taxpayers, a U.S. bailout watchdog said on Thursday.
A new audit of the Public Private Investment Partnership legacy securities program (PPIP) concluded that a criterion that fund manager applicants have $10 billion in eligible assets under management likely was "unnecessary."
The report from Special Inspector General for the Troubled Asset Relief Program did, however, issue some rare praise for Treasury, saying it "constructed a reasonable architecture to accomplish its objective of identifying larger firms to manage PPIFs (public-private investment funds)."
The Public Private Investment Partnership, first announced in March 2009 as markets were still reeling from the financial crisis, was the Treasury's effort to remove toxic securities from bank balance sheets -- the original purpose of the $700 billion Troubled Asset Relief Program to bail out financial firms.
At one time, the Treasury envisioned program buying $500 billion to $1 trillion in illiquid securities by matching private capital with taxpayer money and Treasury loans via funds run by private investment managers. The massive effort was aimed at thawing frozen securities and credit markets and stabilizing banks.
With the help of bond investment groups Pacific Investment Management Co., BlackRock Inc
The Treasury received 141 applications, but ultimately it created only nine funds, with a total purchasing capacity of around $30 billion.
But the watchdog's report said that with only six of the nine fund managers meeting the $10 billion threshold, this criterion was not heavily weighted in the selection process.
"The emphasis on the size of potential fund managers, while perhaps understandable, not only threatened to discourage qualified applicants from applying, but also, given the selections ultimately made, may have been unnecessary," the inspector general's report said.
"As a result, the taxpayer may have lost the benefit of the participation of qualified, albeit smaller, fund managers because they were avoidably deterred from applying or unnecessarily rejected," it added.
Responding to the report, the Treasury acknowledged findings that the program was "adequately documented," and said it had a positive effect on the U.S. financial system.
The program "created a market for the legacy securities and bolstered their value," by reducing any discount due to difficulty of resale, Timothy Massad, acting assistant secretary for financial stability, said in a written response.
"This encouraged financial institutions to begin trading and selling their holdings of these assets, which in turn contributed to a recovery in security prices," he added.
One fund, run by TCW, dropped out of the program, and the Treasury said on Tuesday that the remaining eight funds had raised about $7.4 billion and had about $18.6 billion in total capital invested or awaiting investment as of September 30. The Treasury's maximum commitment to the program was cut to $22.4 billion by financial reform legislation enacted in July.
The Treasury said it had collected $215 million of interest and dividend payments from the PPIP funds by September 30. Based on their asset valuations, each of the funds has generated positive investment returns ranging from 13 to 37 percent, with combined unrealized equity gains of more than $600 million as of June 30.
(Reporting by David Lawder; Editing by Leslie Adler)
