SMF reports the Obama administration is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, according to people familiar with the matter.
No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers.
The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.
These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 bln bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate.
To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans. Some within the administration believe establishing multiple funds could help with that goal.
The funds would most likely target all types of assets, such as mortgage-backed securities, rather than focusing on one specific type of distressed security. Many details remain unclear, in particular, how the government and the private sector will share the risk.
An administration official said a key goal is to provide investors with "price safety" so they feel safe enough to get back into the market.