Call it TARP 2.0, the $1 trillion Public-Private Investment Partnership (“pea pip” for short) aimed at helping banks unload troubled real estate assets. It may yield the best investment bargains since the savings and loan crisis of the late 1980s and early 1990s, but hedge funds fear it might expose them to compensation restrictions, disclosure requirements and even retroactive taxes. “You’re subject to political risk,” warns Mitch Nichter, a partner at Paul, Hastings, Janofsky & Warner, a New York–based global law firm.
PPIP’s bottom line is also worrisome. “There’s a lot of appetite among investors, but banks are not interested in selling at fire-sale prices,” explains Kenneth Morrison, a partner in the Chicago office of international law firm Kirkland & Ellis. “Price discovery is the biggest question mark.”
Under the program, set to debut this month, the Federal Deposit Insurance Corp. will guarantee debt financing, with up to 6-to-1 leverage, for winning bidders. In the second leg of PPIP, to be rolled out later in the year, five investment firms — each managing at least $10 billion in mortgage-backed securities — will be chosen to raise $500 million apiece to buy MBSs. Hedge funds can invest through the five firms or participate under an expansion of the Federal Reserve Board’s Term Asset-Backed Securities Loan Facility (TALF). The Treasury will provide up to 50 percent of the equity.
Michael Collins, co–managing partner of Osprey Management Co., a commercial real estate management compny based in Brighton, Michigan, says he expects gains in the “low double digits” for the highest-quality loans.
