The Treasury Department named nine financial services firms to act as fund managers for the federal government’s $30 billion effort to buy bad mortgage assets from banks.

The Legacy Securities Public-Private Investment Program was initially seen as a critical element of the bailout package.  With billions of dollars of so-called “toxic securities” weighing down the nation’s banks, experts said the government had to create a market for them to get credit flowing and get the economy moving again.

When the Treasury,  the Federal Reserve and the Federal Deposit Insurance Corp.,  first announced the program in March, they said they would make as much as $1 trillion in public money available for asset purchases.  But uncertainty about the effectiveness and efficiency of the program delayed its implementation and lowered its budget.

The firms that won the rights to manage the public-private funds that will buy the toxic securities were AllianceBernstein LP; Angelo, Gordon & Co. LP and GE Capital Real Estate; BlackRock, Inc.; Invesco Ltd.; Marathon Asset Management L.P.; Oaktree Capital Management, LP; RLJ Western Asset Management LP; The TCW Group Inc.; and Wellington Management Company, LLP.

Although each firm will receive an equal allocation of funds from the Treasury to buy assets, under the terms of the management agreements, each is expected to invest as much as $10 billion of its own money. To qualify for the project, the firms had to prove its ability to raise at least $500 million of private capital within twelve weeks and commit to investing at least $20 million of it.

Other requirements included a minimum of $10 billion of “eligible assets” under management and a demonstrated operational capacity to manage the funds.

Pacific Investment Management Co., better known as Pimco, said it withdrew its application to become one of the fund managers in early June. It had been viewed as almost certain pick.

Pimco, which is one of the biggest buyers and sellers in the bond market, did not explain its decision. But some observers had questioned whether the company’s extensive trading activities would create too many conflicts of interest with the government’s toxic-securities program.

Treasury also qualified a number of small-, veteran-, minority-, and women-owned businesses to partner with the winning fund managers. They included Advent Capital Management LLC; Altura Capital Group LLC; Arctic Slope Regional Corporation; Atlanta Life Financial Group; Blaylock Robert Van LLC.; CastleOak Securities LP; Muriel Siebert & Co. Inc.; Park Madison Partners LLC; The Williams Capital Group LP.; and Utendahl Capital Management.

Treasury did not post copies of its contracts with the financial management firms, though its transparency policy allows it five to ten days since closing to do so.

BailoutSleuth will continue to monitor the story and update readers accordingly.

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The Treasury Department has announced details of its plan to buy $500 billion to $1 trillion in so-called “toxic assets” from banks and other financial companies, through partnerships with private investors.

The Treasury Department will use $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program to finance the government’s investment in pools of distressed real estate loans, mortgage-backed securities and other assets, according to an overview posted on the agency’s web site.

It refers to them by a more benign name — legacy assets

The plan is built around three main principles: Maximizing the impact of taxpayer dollars, sharing the risk and profits with private-sector partners, and using market competition to establish asset prices.

Here’s how the program would work: A bank that wants to sell loans can approach the Federal Deposit Insurance Corp. The FDIC decides whether to create an investment pool around the assets. If so, it auctions the pool and forms a public-private partnership with the winning bidder.

The plan relies on leverage. The Treasury Department offered an example using a 6-to-1 debt to equity ratio. In its example, a pool of assets with a face value of $100 sold at auction for $84.  In that scenario, the FDIC would provide financing guarantees for $72, leaving $12 of equity. The Treasury Department would provide half of the equity funding, or $6, as would the private investor.

The private investor would be responsible for the servicing and disposition of the loan pool, using asset managers approved and overseen by the FDIC.

The mechanism for mortgage-backed securities is different. The Treasury Department says it will approve as many as five asset managers with a track record for purchasing such assets. They can then seek money from private investors, with the Treasury Department providing matching equity for every dollar raised.

The asset managers can get additional debt financing for an amount equal to 50 percent of the total equity in the fund. The Treasury Department said that, in some cases, it might provide amounts up to  100 percent of the equity, adding even more purchasing power. The asset managers will have full discretion over the investment decisions of the funds, although the Treasury Department said it expects that they will largely adhere to a long term, buy and hold strategy.

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