Daily Briefing Weekend Edition

TARP Seeks Manager

By Brian Collins

WASHINGTON-The Treasury will pick its first asset manager this week as the government tries to jump-start a new program to purchase troubled mortgage securities from hundreds of financial institutions.

The $700 billion "Troubled Asset Relief Program" designed by Treasury and approved by Congress will use asset management firms, such as Blackrock and PIMCO, to purchase and manage troubled MBS, in particular subprime-backed bonds.

As expected, the mortgage industry is keenly interested in what the government will pay for subprime ABS, including the now almost worthless "B" pieces or junior tranches.

"We have several policy teams designing detailed programs to purchase mortgage-backed securities, whole loans and equity-related instruments," said Treasury secretary Henry Paulson.

Treasury is planning to conduct its first "reverse" auction in a few weeks where financial institutions sell their troubled mortgage securities to the government. In a reverse auction, sellers bid against each other and Treasury accepts the lowest price.

Securities will "likely be acquired through reverse auctions and other market mechanisms designed to support efficient and effective price discovery and generate observable market-based valuations, to the extent practicable," the agency says in its solicitation for asset managers.

The Emergency Economic Stabilization Act that President Bush signed on Oct. 3 provides Treasury with other tools to deal with delinquent mortgages, including the power to invest in financial institutions to prevent them from failing.

Towards that goal, EESA adds broad, flexible authorities for Treasury to buy or insure troubled assets, provide guarantees and inject capital.

FDIC chairman Sheila Bair believes the authority to use loan guarantees and credit enhancements on whole loans could give Treasury a carrot to get institutions to modify mortgages without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," the Federal Deposit Insurance Corp. chairman said.

Treasury will be hiring asset managers to purchase and handle whole loans.

Contractors will be directed to assist troubled borrowers and facilitate refinancings through a Federal Housing Administration program called "Hope for Homeowners."

Meanwhile, presidential candidate Sen. John McCain, R-Ariz., has suggested redirecting TARP funds to rescue distressed homeowners and prevent foreclosures. Details about the plan have been sketchy. Mr. Paulson said he didn't know enough about the McCain plan to comment on it.

Mr. Paulson told reporters that Treasury will buy MBS and whole loans and work to avoid foreclosures. "When we are the owners of securities we will have more leverage to keep homeowners in their homes," he said.

Last week, Mr. Paulson appointed a former Goldman Sachs vice president, Neel Kashkari, to run TARP. Mr. Kashkari, who has worked at Treasury for two years, now serves as interim assistant secretary for financial stability. Earlier this year he began designing the TARP purchase program as a fail-safe project.

Secretary Paulson warned last week that passage of EESA and implementation of TARP will not begin an "immediate end to current difficulties" in the financial markets.

Meanwhile, Treasury has started purchasing agency MBS. Also, Fannie Mae and Freddie Mac will increase their MBS purchases to support the housing market. "As Treasury and the GSEs increase their purchases, mortgage affordability should improve for Americans," Mr. Paulson said.

Treasury said it would purchase up to $10 billion in Fannie/Freddie MBS. The two GSEs, meanwhile, have been granted authority to purchase an additional $150 billion in MBS.