Free leverage from Uncle Sam! What's not to like?
WSJ: ... New York-based fund giant BlackRock is launching a closed-end mutual fund aimed at allowing ordinary investors to put their money into the kind of toxic mortgage-backed securities that nearly brought down the financial system a few months ago. Shares are expected to go on sale in about a month.
The BlackRock Legacy Securities Public-Private Trust, which may raise up to about $1 billion, will be sold through brokers and advisers. It will try to buy mortgage-backed securities at distressed prices from banks looking to shore up their battered balance sheets. The fund will invest alongside the U.S. Treasury as part of the Public-Private Investment Partnership, or PPIP, launched earlier this year. BlackRock is among a small group of firms picked to take part in PPIP.
... The fund will also benefit from helpful financial engineering courtesy of the U.S. government. PPIP was set up to encourage private investors to help bail out the financial system. So for every dollar invested, Uncle Sam will provide another $2—$1 in equity and $1 in debt. The debt’s cheap, too: about two percentage points over the LIBOR interbank rate. That should boost returns.
Sources are hoping that, when you factor in the financial engineering, the fund will be able to earn maybe 10-12% annually over its ten-year life.
... “For now, the bulk of toxic assets are not going to be in play,” Harvard law professor Lucian Bebchuk, one of the intellectual architects of PPIP, told me. Changes to accounting rules and government stress tests, have taken off some of the pressure off banks, so Professor Bebchuk says banks are not as motivated to sell their toxic assets as they were when PPIP was set up in March. “For many types of toxic assets, even if the banks can get a price that’s fair, if it’s at a discount to face value they don’t have an incentive to do it,” he says.
Furthermore, thanks to the stock market rally the banks are feeling more confident—and have a lot more access to capital.
... Meanwhile, the fundamentals of MBS continue to worsen. Fitch Ratings says 6.8% of (non-agency) prime mortgages are now delinquent—twice as many as were delinquent six months ago. The figures for Alt-A are 21%, and for sub-prime, 40%. They’re still getting worse. Fitch director Grant Bailey says mortgage delinquency rates won’t stabilize until house prices and unemployment rates do.
