Peter Barnes writes an article about trades being scrutinized as suspect regarding TARP investments.
January 31, 2010
A government watchdog is investigating “suspect” securities transactions made last year by an unnamed investment management company that partnered with the Treasury Department in a program under its $700 billion bank bailout.
Treasury, which detected the trades through its own internal monitoring system and brought them to investigators’ attention, denied any impropriety by the firm.
In a new report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program [TARP], said he launched an investigation into “a series of unusual trades” undertaken by the investment company, which he declined to identify. He also did not disclose the value of the transactions. [Emphasis added]
The firm is one of several financial companies that partnered with Treasury in the “Public-Private Investment Program” [PPIP], which the department launched last year to purchase billion of dollars in toxic assets from banks, including securities backed by souring mortgages. Together, the firms and the department have set up eight public-private investment funds [PPIFs] to buy bad assets; Treasury has already invested nearly $20 billion in TARP resource to the ventures.
In his report, Barkosky suggested taxpayers may have been cheated in the flagged transactions.
“A series of suspect trades…has already occurred within one of the (funds),” Barofsky wrote. “A portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF.” [Italics added by Barofsky.]
Providing additional details, Barofsky said the “series of unusual trades” were made by a firm that “operates both a PPIF and one or more non-PPIF funds that invest in similar securities [i.e., mortgage-backed securities [‘MBS’]]. In the case of this fund management company, the same person is the portfolio manager for both the PPIF and (a) non-PPIF fund. In late October, the portfolio manager directed that a particular MBS from the non-PPIF fund be sold after the security…had been downgraded by a rating agency. According to the company, multiple bids were received, and a quantity of the security was sold to a dealer. Within minutes of the sale, however, the same portfolio manager purchased, for the PPIF, the same amount of the same security from the dealer at a slightly higher price. Later in the day, the portfolio manager bought more of the security for the PPIF from the dealer at the original price.”
The report said the investment management company involved in the PPIF “asserts that there was nothing inappropriate about these trades, and Treasury has concluded that the trades did not violate PPIF rules.”
Barofksy said, however, that “the facts…give rise to difficult questions. Was the initial purchase really arm’s length, or was the dealer aware that the portfolio manager was prepared to repurchase the securities immediately? How can a manager conclude that it is wise to sell a security at one price but then almost simultaneously repurchase the same securities at a higher price? Were these trades designed to push the risk of this downgraded security from the private, non-PPIF fund onto the taxpayer supported PPIF? SIGTARP will seek the answers to these questions as part of its ongoing investigation.”
Barofsky disclosed the probe as part of his effort to push Treasury to adopt stricter conflict-of-interest rules in PPIP, including barriers or “walls” between investment managers – in effect, requiring separate managers for PPIP funds — within participating financial firms.
In a letter to Barofsky, Herbert Allison, the Treasury’s assistant secretary for financial stability, said PPIP compliance rules designed to monitor trading activity “effectively protect taxpayers without the need of segregated investment teams.”
Allison said separate teams “would be detrimental to the program because it would reduce our ability to retain experienced PPIP fund managers and as a result would reduce performance of PPIP funds.” He noted Barofsky “initially became aware of the circumstances of the trading activity…because Treasury discovered them through its PPIP compliance surveillance program.”
Some of the investment management firms in PPIP include Blackrock, AllianceBernstein and Wellington Management.
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Taking one of the investment management firms above, it is noted from their own website:
AllianceBernstein
The US Department of the Treasury has selected AllianceBernstein as one of nine pre-qualified fund managers in its Public-Private Investment Program (PPIP). Under the program, AllianceBernstein will partner with the Treasury—which will be a co-investor and will provide various leverage options for PPIP funds—to create a Public-Private Investment Fund (PPIF) which will invest in distressed “legacy securities” that are clogging the balance sheets of many financial institutions.
The Treasury selected AllianceBernstein after an extensive evaluation of submissions from over 100 unique applicants. As part of our application and to most effectively leverage this opportunity, AllianceBernstein has formed a strategic relationship with Greenfield Partners, LLC, Rialto Capital Management, LLC and Altura Capital Group, LLC. Our selection is strong evidence of our firm’s investment management capabilities within the fixed-income space, the differentiating characteristics that our strategic relationships bring to the team, and our commitment to creating innovative investment solutions.
http://www.alliancebernstein.com/investments/us/StoryPage.aspx?nid=5324&cid=62785
Press release: http://www.alliancebernstein.com/CmsObjectABD/PDF/SpecialAnnouncements/090600_PPIP_External_PressRelease.pdf
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End notes:
Will another Inspector General be intimidated? Thrown under the bus for inquiring about the “series of unusual trades” within the PPIP?
Will this story be swept under the rug?
Will any of the MSM’s do an in-depth reporting of some of the investment management firms in PPIP including Blackrock, AllianceBernstein and Wellington Management?
Stay tuned.
