WASHINGTON — The Obama administration significantly downsized its program to buy toxic mortgage-backed securities while naming nine private investment companies to purchase the assets with the help of government money.
The announcement formally launched a long-awaited initiative to help clean the balance sheets of financial institutions, allowing them to expand credit and help the economy to recover. But the need for the program has lessened as the financial crisis has eased, Treasury officials said Wednesday.
Newport Beach bond giant Pimco was an enthusiastic early supporter, giving the original plan a major boost by saying it wanted to participate. But, surprisingly, it wasn't one of the government's nine partners.
The company said Wednesday that it had withdrawn its application because of "uncertainties regarding the design and implementation of the program." Treasury officials would not comment on Pimco's application.
Under the complex program, private fund managers would raise up to $10 billion and tap up to $30 billion from the government to buy troubled securities backed by bundles of mortgages.
That Public Private Investment Program, announced in March, was part of a two-pronged strategy for purchasing as much as $1 trillion in toxic assets. The original plan also called for the use of federal debt guarantees and Treasury money to lure investors into buying mortgage loans directly from banks. But that initiative, called the Legacy Loan Program, is still only a pilot project under the Federal Deposit Insurance Corp.
It now appears that the two programs, which took longer to design than many analysts had expected, will be much smaller in scale than originally estimated.
Outside experts said it was far from certain that the program would do much for the banking system.
"This is largely a face-saving announcement," said Simon Johnson, an economist with the MIT Sloan School of Management. "It is inconsequential in terms of whether the banks will have enough capital."
Aaron Deer, a banking analyst at investment firm Sandler O'Neill, said he wasn't sure whether the program would help create a market for securities that can't be converted to cash easily or soon.
There continues to be a significant gap between the price that securities owners want and that which potential purchasers will pay, he said. If the offering prices for the securities are too low, banks may choose to sit on them rather than take a hit to their balance sheets.
