Toxic-Asset Rescue Funds Start

While many investors are focused on the winding down of government programs, one notable piece of the rescue effort is finally ramping up.

Five investment funds that raised $1.94 billion in private capital to purchase troubled assets through the Public Private Investment Partnership can start buying next week. The PPIP, announced by the Treasury back in March, was designed to boost demand for toxic securities backed by residential and commercial mortgage loans.

While prices have been rallying for months, sometimes as much as 50%, many public pension funds have invested in the PPIP funds. Because of the gains, investors are unlikely to get the 20% to 30% returns that were expected when the program was first announced. Instead, analysts and investors say returns of 15% are more likely.

The recent surge in prices has caused critics to question the need for the government program. The PPIP did its job, they argue, even before it even came into existence. But others say the government involvement will help add a floor under the market, especially if delinquencies on the underlying mortgages rise. The program, too, may help banks and insurance companies offload toxic assets that are weighing on their balance sheets.

"It's not only about how many assets the funds will be able to buy and the trading volume, but there's a positive psychological effect from the PPIP," said Jim Higgins, chief ****utive of Sorin Capital Management.

In the PPIP program, the Treasury pledges to match the funds raised by approved money-management firms. On top of that, it will provide leverage, or loans, to the fund, equal to the full amount of the fund -- doubling its spending power. So far, with the potential leverage on offer, the funds that are launching could put $12.27 billion to work, according to the Treasury department. The program is expected to ultimately reach $40 billion, including both private and public financing.

Some of the securities that can be bought through PPIP have jumped from 30 cents on the dollar in March to more than 65 cents, even though they include some of the worst-hit in the housing and credit crisis -- those backed by subprime or Alt-A mortgage loans. Securities backed by mortgage loans to prime borrowers or commercial real-estate developers are also targets for the funds, but the loans behind those investments are increasingly delinquent.

"I'd say 20% returns are pretty much out of the question," said Walter Schmidt, an analyst at FTN Financial, with most of the market yielding between 4% and 8%. He said an investor can only achieve returns of 20% or higher if it bought the riskier, lower-rated assets that have even weaker loans backing them and would be unlikely to attract PPIP fund buyers.

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