Smart Borrower Blog

Pimco Backing Out of U.S. Treasury Toxic-Debt Program

Jul 10th, 2009 @ 2:12 PM by Alden Smith

Pimco, the world’s largest bond manager, has backed out of the treasury’s plan to buy up to $40 billion in assets from banks, according to Bloomberg. The plan, called the Public-Private Investment Program (PPIP), was originally expected to buy as much as $1 trillion in mortgage backed assets and devalued real estate loans.

Pimco had originally announced in March that it would participate in the program. In June, the bond manager withdrew its application for participation, citing uncertainties about the design of the initiative.

The government’s plan is smaller than originally expected. With Pimco backing away from the program, questions are being raised about its validity, according to Eric Petroff, a director of research at Wurts and Associates, a consulting firm based in Seattle.   Mr. Petroff is concerned that institutional investors may not wish to sign up because the plan is very complicated and the expected return on investments is unclear.

The plan was originally put in place to speed recovery of the financial markets. Banks would see distressed debt removed from their balance sheets. With debt removed from balance sheets, banks would be more open to purchasing mortgage linked securities.

Pimco is not commenting on its specific reasons for withdrawal. They had said that they will continue to take part in other rescue efforts, such as TALF, which has been designed to restart the market for consumer loans.

Geoff Bobroff, an independent fund consultant in East Greenwich, Rhode Island, comments that the program has been scaled back from its original plan. Now, the government will invest up to $30 billion, and participating investors may raise up to $10 billion.

The withdrawal of Pimco opens the door for its competitors, such as BlackRock, to participate in the plan. RLJ Western Asset Management LP of Bethesda, Maryland, and Western Asset Management of Baltimore, Maryland will attempt to raise $1.1 billion from institutions and private investors. Other institutions also plan to raise cash for the project.