Did PPIP Over-Promise, Under-Deliver?

WASHINGTON, DC-After months of administrative prep work, close to a year ago the Treasury Department's Public Private Investment Program launched. The selected asset managers, armed with more than $12 billion in debt and equity purchasing power, set out to acquire the toxic assets clogging banks and financial institutions’ balance sheets.

Little more has been revealed about the program since then, save for short, less-than-transparent reports from Treasury every quarter or so. In its last, released a few weeks ago, Treasury  reported that it has generated a 15.5% return on the equity portion of its investment, which equals roughly $4 billion out of the $12 billion.

Unfortunately, Treasury is not providing aggregate returns, just the returns for each of the funds, reports Linus Wilson, assistant professor of Finance at University of Louisiana at Lafayette. Wilson, who has been tracking TARP, TALF and PPIP since their inception, tells GlobeSt.com that much of his analysis is based on his own extrapolations. The headline 15.5%, he says, is a weighted average across the funds.

In his estimation, the true blended number, including both debt and equity, is a return of 5.4%. And even that number is suspect, he readily acknowledges.

"Treasury doesn’t disclose its holdings, so we can’t see what mortgage and real estate bonds have been purchased." He says. "They are also marking to model, and we have no idea what model they are using or if it is a reasonable one."

That said, he added that 5.4% is not a bad return. "I think it's great they are even earning a profit at all." Wilson said he doesn’t expect Treasury to earn a profit on a risk-adjusted basis though, for a reason that is likely apparent to the private-sector funds competing for the same assets:  "The program’s incentives encourage asset managers to take big risks and perhaps overpay for some of the assets. For that reason I don’t think they will earn the risk-adjusted returns that other investors do."

Wilson estimates that the PPIP asset managers could be overpaying by as much as 50% in some cases. "This is not to say they don’t have incentives to get the best prices. It's just that they also have incentives to swing for the fences and reach for some securities that maybe they shouldn’t be reaching for."

PPIP, though, is not large enough, even at $16 billion, to have moved the dial significantly in terms of distressed pricing.