By JENNY ANDERSON, VIKAS BAJAJ and LESLIE WAYNE
Published: September 21, 2008
Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.
Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.
At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.
Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.
“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.
The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.
The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”
The lobbying became particularly intense because Congress plans to approve a package within just two weeks, without the traditional hearings and committee process.
“Of course there will be fierce lobbying,” said Bert Ely, a financial services industry consultant in
Mr. Ely said the open-ended nature of the Treasury’s plan could be interpreted to mean that the government was open to acquiring “any asset, anywhere in the world.”
“The question that I am raising — is there any limit?” Mr. Ely said.
Each part of the financial industry is pursuing its own interests.
Small banks, for example, are pushing the government to buy loans they made to home builders and commercial developers. Wall Street banks are lobbying to temporarily suspend certain accounting rules to avoid taking big losses on the assets they sell to Treasury, which would weaken them further.
Over the weekend, the Securities Industry and Financial Markets Association, Wall Street’s main trade and lobbying group, held conference calls to discuss “your firms’ views and priorities related to Treasury’s proposal,” according to an e-mail message sent to members.
One of the calls addressed the fact that municipal securities were not included in the proposals released at the end of last week. Some bankers are pushing for government support of those securities as part of a broader effort to restore investor confidence in money market funds.
The group also discussed which securities would be eligible to be sold to Treasury. Under the latest proposal, the government would buy securities issued on or before Sept. 17.
But some bankers debated whether the cutoff date should be December 2007, when the market was clearly seizing up, to avoid bailing out those who bought securities recently. Other firms hope to be hired to manage the assets that Treasury acquires, a job that could earn them $1 billion a year, even if they charged fees that were modest by industry standards. Among them are the asset management companies Pimco and BlackRock. Morgan Stanley, the investment bank, is also vying for the work.
Some private equity firms, including the Blackstone Group, may be interested in pursuing an asset-management assignment from the government, people briefed on the matter said. Such firms have already expressed interest in buying up distressed debts after having bet against them early last year.
That raises complications because those firms hold assets similar to the ones the Treasury plans to buy. Democrats suggested on Sunday that a provision be added to avoid any conflicts of interest, with a firm making money from handling assets like its own.
William H. Gross, chief investment officer of Pimco, which manages about $830 billion in assets, would like to be an asset manager for the government but said he had not been in touch with Henry M. Paulson Jr., the Treasury secretary, over the weekend. Mr. Gross is among the financial executives Mr. Paulson, who previously headed Goldman Sachs, has regularly consulted with since the financial crisis began.
Another contender is Morgan Stanley, which advised Treasury on an unpaid public service basis on its takeover of Fannie Mae and Freddie Mac and on the American International Group, the insurer that the Federal Reserve agreed to lend $85 billion to last week in consultation with the Treasury Department.
BlackRock, a big
There were signs of the industry’s fingerprints on drafts of the legislation released over the weekend. While an earlier draft said that only firms with headquarters in the
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Congressional Democrats and advocates of low-income homeowners were also pushing for the direct acquisition of loans, because that would give the government more say over how collection agents modify the terms of onerous mortgages.
“In addition to buying the assets we have to have a workout plan,” said Douglas Dachille, chief executive of First Principles Capital Management, an investment firm in
Perhaps the biggest question about the Treasury’s acquisition plan is how the government will decide how much it is willing to pay for the loans and securities it acquires. Will the government drive a hard bargain and acquire assets for the lowest possible price to protect taxpayers against losses? Or will the Treasury Department, in the interest of jumpstarting the credit market, try to bolster large financial institutions like Citigroup and Washington Mutual by paying a slight premium to the markets’ valuation of these troubled assets? Over the weekend, Treasury said it might use “reverse” auctions in which financial institutions rather than the Treasury — as buyer — would submit bids.
“The trick for the Treasury and American people is to make sure that the price exacts enough of a toll on the originators and holders of these securities, but not enough to destroy lending,” said Mr. Gross of Pimco, who has argued in recent weeks that the government must buy distressed debt to deal with a “financial tsunami.”
Analysts and investors say they expect financial firms to hold onto their troubled securities until the government begins acquiring assets through reverse auctions and negotiations. Eventually, the Treasury will return to the market to sell the assets back to private investors, but that could be a few years away.
“There will be that period where the Treasury takes the place of the private market,” Mr. Gross said. “Hopefully they will get out of that market but we will have to see how quickly that takes place.”