New funds to let investors profit from tainted assets

Debt instruments will let public benefit from banks' future growth.

Gulf News

New York: Wall Street stands to get richer off the latest instalment of the financial-system rescue. But this time, some individual investors might be offered a piece of the action.

Two of the country's biggest money managers - Newport Beach, California-based Pacific Investment Management Co, known as Pimco, and New York-based BlackRock Inc - say they might launch funds that would allow individuals to have a stake in some of the bad assets to be purchased from banks.

Under one of two programmes announced on Monday by Treasury Secretary Timothy F. Geithner, the government will invite money managers and other investors to buy residential and commercial mortgage-backed bonds from banks using a combination of the investors' capital and government capital.

The idea is for the money managers to buy the bonds at prices that will not destroy the banks but that still leave a good chance for the investors and taxpayers to profit as the underlying loans are collected or sold.

Bill Gross, co-chief investment officer at Pimco, said his company was looking into the idea of creating mutual funds that would tap into the programme. BlackRock is doing the same, said Curtis Arledge, co-head of fixed income at the company. "I think it's a very good opportunity for investors," Arledge said.

But the format of such funds for individuals probably would be a "closed end" portfolio rather than the more common "open end" portfolio, Arledge and Gross said. A closed-end fund raises a specific amount of capital from investors and then invests the proceeds in a pool of securities. The funds' shares typically trade on a securities exchange, such as the New York Stock Exchange. With an open-end fund, by contrast, investors can buy new shares in the fund at any time and sell them back at any time.

Closed-end funds are ideal for illiquid assets that might take years to pay off. By contrast, open-end funds must set a value on their holdings daily.

Recession: Effect in US may linger

The recession in the United States will stretch well into next year, probably raising the need for another fiscal stimulus package at least as large as the first one, prominent economist Martin Feldstein said on Tuesday.

Feldstein, a Harvard University professor who is a member of President Barack Obama's Economic Recovery Advisory Board, said that the stimulus would offset only a relatively small piece of the likely fall in spending, exports and construction.

"I'm afraid that the economy will continue to slide down well into next year," Feldstein, a former head of the National Bureau of Economic Research, said in an interview in Beijing where he was attending a conference.

"I don't know when it will end, but the forecasts that it'll end later this year I think are too optimistic," he said of the recession.

President Obama signed into law last month a $787 billion (Dh2.89 trillion) fiscal stimulus plan, comprising $287 billion in temporary tax breaks and $500 billion in public spending.

That is in addition to the trillions the government has pledged or allocated to shore up the financial sector, including a public-private plan announced on Monday to help rid banks of $1 trillion in assets of uncertain value.

- Reuters