About That Public-Private Fund For Retail Investors…

Creating a Bailout Army

Disclaimer:  My commentary below is strictly a relaying of publicly-available news from major publications.  I have absolutely no interest in being responsible for anyone’s investments who reads this website without doing their own homework.

OK, I had to satiate the gods of regulation.  Now that it’s just us adults, I thought I’d discuss yesterday’s news that the BlackRock Bailout Closed-End Fund is currently being vetted by the SEC.  This is the fund that is meant to be an access point for retail investors to the Public-Private Investment Program or PPIP that I first wrote about back in April (Creating a Bailout Army of Retail Investors).

At the time, I was pretty open to the possibility, and now some new details have emerged.

I haven’t seen anything official on the fund or it’s construction, and as such, I’ve no opinion on whether it’s good or bad yet.

I do have a few thoughts on the concept itself, however:

• For starters, there’s about $1.5 trillion worth of distressed mortgage-backed assets out there in the ether.  Now that credit markets are loosening up and equity markets are signaling the possibility of a turn, the banks will not want to part with all of these distressed assets for PPIP purposes, but there’s plenty out there up for grabs.
• BlackRock has certainly sidestepped most of the carnage in this market, so presumably, you could argue that they are as good a steward on a distressed fund as any of their competitors.  The fact that CEO Larry Fink, along with Pimco’s Bill Gross, probably appear on the White House’s speed dial doesn’t hurt the image either.
• The name is interesting: “BlackRock Legacy Securities Public-Private Trust“…the “Legacy” term is a nice touch, although clearly euphemistic for “Toxic” or “Almost Worthless” in many cases.
• They better come out with a damn high yield if they expect to attract much interest.  If you can buy a closed-end fund on the secondary market that owns high-grade municipal bonds with 6% annual interest (taxable equivalent of 10% for the high tax bracket), then what must a fund that will invest in formerly triple A-rated debt securities yield in order to be attractive?
• Payout schedule to investors will also be crucial.  Monthly dividends may be too difficult logistically, but quarterly ones will be a must.  Otherwise, because this idea is so new, there will be too much trepidation on the part of investors looking for some sign that income is being generated.  They will walk or not show up at all for a semi- or annual income payment.
• Style drift may also become a factor.  How does BlackRock handle mortgage-backed securities that are no longer considered distressed based on an improving market?  Do they hold them to maturity in this fund or monetize them to take that capital back to the slop trough for more distressed stuff?
• BlackRock will only be buying securities that are either commercial mortgage- or residential mortgage-related, no exotic derivatives and no other types of securitized loans will be in the portfolio.  Further, it says risk will be mitigated by the fact that all the securities it buys into will have been at one time considered AAA by at least two of the three big ratings agencies.  Not that we trust a word out of a ratings agency’s despicable mouth anymore…but still, it’s a nice thought.
• I also thought that this was interesting: “BlackRock’s fund will combine the money it raises from investors with a matching equity contribution from the government, another feature meant to ensure that taxpayers will reap any upside from investments in these troubled securities. – NYT” So the individuals who partake in the fund may not be backed by the government, but they certainly have the government as a co-pilot and as co-investor.  This is a first, I believe, and kinda weird to get used to; it’s like a bookie throwing his cash into a pool on the same side as his betting customers for the Super Bowl.

The bottom line is that the concept may be appealing to high net worth investors who are wondering why their taxes are being used for the bailouts while they themselves don’t have any upside.  That said, there are way too many unknowns at this early stage; even my inside people at BlackRock were caught by surprise that the fund was submitted for approval last Friday.  It’s too soon to tell if this fund is worthwhile or if it’s just as poisonous as some of the securities it will hold.  Stewardship will be important, but structure more so.

Once there is a firm offering period and prospectus available to the public, I will be forbidden from discussing the fund on this site, as we have essentially decided as a country that grown-ups should not be responsible for their own decisions, they should instead be able to blame anyone who expresses an opinion that could be construed as advice.  I don’t give investment advice away on the internet, so please don’t do anything with distressed assets without doing your own homework.  And be careful!

Full Disclosure:  My commentary above is for informational purposes only and should not be construed as an invitation to buy or sell any securities.  Please see my Terms & Conditions page for a full disclaimer.

Sources:

Fund to Let Public Buy Distressed Assets (NYT)