Like a steak that had been too rare and is now looking scrumptious, the new Public-Private Investment Program (PPIP) from the Treasury Department is starting to look awfully enticing to fixed-income investors. Which is exactly how the federal government likes it.
The PPIP has two parts: a legacy loan program and the legacy securities program. The legacy loan program is being administered through the FDIC (see here) and offers six-to-one leverage to investors. The Federal Reserve is managing the legacy securities program (the Fed does not appear to have a site up for the program yet). It, too, offers leverage to investors, although the exact degree of leverage is not disclosed.
The fact is between PPIP and the TALF, investors are starting to look at some enticing returns. One investor told me his internal calculations put the estimated internal rate of return (IRR) on TALF assets of something in the order of 20% to 30%, which is massive. The IRR on PPIP investments is likely going to be rich for investors, too.
The big dilemma for investors is simply whether they want to bite on the offer considering all the brouhaha over executive pay. If a hedge fund scores a 30% return on TALF investments, will it be able to take their “2 and 20” or is the government going to come in a tax that retroactively at 90%? That’s the big question right now. What is not in question is whether the returns will be there, because at first blush they are — which is why all the bank stocks are rallying so far this morning.
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