With the banking crisis now a distant memory, nobody talks much about toxic assets anymore. Somehow that problem just seemed to go away by itself.
But technically the PPIP isn’t dead, as there’s still an effort afoot to move and juice the price of some assets courtesy of a little leverage from Uncle Sam.
From the very beginning, there’s been talk of some kind of mutual fund so that general investors could get in on the action, and it sounds as though Blackrock is moving forward on this idea:
WSJ: New York-based fund giant BlackRock is launching a closed-end mutual fund aimed at allowing ordinary investors to put their money into the kind of toxic mortgage-backed securities that nearly brought down the financial system a few months ago. Shares are expected to go on sale in about a month.
The BlackRock Legacy Securities Public-Private Trust, which may raise up to about $1 billion (WSJ fixed this detail to note that BlackRock is raising $1-$1.3 billion total, including institutional investors), will be sold through brokers and advisers. It will try to buy mortgage-backed securities at distressed prices from banks looking to shore up their battered balance sheets. The fund will invest alongside the U.S. Treasury as part of the Public-Private Investment Partnership, or PPIP, launched earlier this year. BlackRock is among a small group of firms picked to take part in PPIP.
The fund will also benefit from helpful financial engineering courtesy of the U.S. government. PPIP was set up to encourage private investors to help bail out the financial system. So for every dollar invested, Uncle Sam will provide another $2—$1 in equity and $1 in debt. The debt’s cheap, too: about two percentage points over the LIBOR interbank rate. That should boost returns.
Sources are hoping that, when you factor in the financial engineering, the fund will be able to earn maybe 10-12% annually over its 10-year life. That would be a pretty good return.
You should be wary for plenty of reasons. If the firm can acquire assets at real bargain-basement prices (even with the leverage taken into account), then there’s little reason to leave a whole lot of upside to the little guy. In other words, as a retail investor, you should have no good reason to believe that the assets they acquire are actually undervalued in any manner. Where does that 10-12% annualized rate really come from?
Also, remember, it’s a mutual fund and we’re guessing this highly specialised, boutique fund is going to be affording its managers a generous fee. The article doesn’t say what it’s going to be though.
And definitely watch the marketing. Watch for people to talk about how a fund like this is somehow “patriotic,” as you’ll be doing your little role in helping to bail out the banking sector. The banks have already gotten a massive bailout — there’s no reason to be paying some Red, White, & Blue premium on your investments to bail them out a little more.
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