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Geithner's gift to Pimco, BlackRock, et al.

Last week, in our post on the Fortune profile of Bridgewater Associates and its chief, Ray Dalio, I mentioned that we'd be keeping an eye on whether or not Bridgewater would join the rather select group of investors eligible to invest in the Treasury's public-private investment partnership (PPIP).

As it turns out, Bridgewater has decided not to invest in the PPIP. Ray Dalio offers his reasons for not joining the plan in this letter to investors, excerpt courtesy of Clusterstock.

I'm not sure I understand all the issues at work here, but the gist of the argument seems to be that Dalio sees a clear conflict of interest for the few investment firms eligible to be the "fund managers" that would purchase toxic assets from banks.

He also sees a great deal of political risk for investors in the plan, due to perceived collusion among the group:

"Then there is the issue about the political risk, which we are more concerned about because there will be such a limited number of managers being allowed to participate in this program that it raises possibilities (or at least perceived possibilities) of them colluding because they all know each other. Either these investments will make a lot of money for their investors or the government will lose a lot of money -- in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they "abused" the system."

Today, Bloomberg reports that Geithner's plan to rid banks of toxic assets will benefit Pimco and Bill Gross, among others.

"Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really ‘toxic’” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben S. Bernanke said March 20 that “credit market dysfunction” is countering efforts to fix the economy."

Bloomberg calls it "Geithner's non-recourse gift" that keeps on giving. Nice work, if you can get it.

Related artices and posts:

1. Treasury's very private asset fund - WSJ.com.

2. Geithner's gift to Pimco - Bear Mountain Bull.

3. On PPIP and Geithner's amazing power grab - Finance Trends.

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