Will Bailout Funds Benefit Main Street?

Can the Obama administration convince ordinary Americans that the rescue of the financial system serves everybody and not just Wall Street institutions? If the government succeeds in pushing fund managers to create a new breed of investment instrument, small investors may be able to profit from bailout initiatives.

The New York Times recently reported about the prospects for small investors to cash in on this new-fangled vehicle, but details about its administration and marketing appear sketchy.  Resembling mutual funds, these so-called “bailout funds” would buy mortgage-backed securities from failing banks at fire-sale prices.  So far it’s exclusively been gigantic private investors that have bought toxic assets from weakened financial institutions and, in turn, stand to reap huge profits if real estate values rebound. A number of BE 100s asset managers have reviewed these vehicles to determine whether they prove to be a viable option for Main Street investors. “We think it is a mechanism to provide an investment opportunity at all portfolio levels to share in the government quasi-guarantees,” says Eugene A. Profit, CEO of Silver Spring, Maryland-based Profit Investment Management (No. 14 on the B.E. Asset Managers list with $1.4 billion in assets under management).

The proposed investment funds would be akin to the U.S. war bonds citizens bought to help finance the military effort during World War I.  Bailout funds would give retail investors a chance to profit from helping to resolve the current economic crisis.  Still outraged about huge bonuses paid to executives who work for institutions that received a portion of the $700 billion from the Troubled Asset Relief Program (TARP), some taxpayers may view this investment as an opportunity to achieve significant gains by taking a risky bet on economic recovery.

Reportedly, these funds are still under review and may take several months before they’re established. In an interview with Black Enterprise magazine earlier this week, Rep. Charles Rangel, chairman of the powerful House Ways and Means Committee that has worked closely with Obama administration officials on creating liquidity in capital markets, says he was not fully aware of plans to make such instruments available to small investors.

BE 100s money managers, however, have weighed in on the viability of this new type of investment. Not all asset managers will likely participate in its distribution and management.  For instance, Boston-based Rhumbline Advisers (No. 2 on the B.E. Asset Managers list with $19.1 billion in assets under management) will maintain its ultra-conservative approach. According to its management, the firm does not invest in mortgage-backed securities, “junk” bonds or similar high-risk vehicles.

Jason Tyler, a senior vice president at Chicago-based Ariel Investments L.L.C. (No. 3 on the B.E. Asset Managers list with $13.2 billion in assets under management) asserts that opportunities for small investors has not been the primary focus of the financial recovery plan.  He says the term-asset-backed Loan Facility program (TALF) designed by the Federal Reserve to increase available for entrepreneurs and households is “really not for small investors at all. This is really geared toward institutional investors that have a lot of background in valuing these assets. Retail investors will be able to get to these assets but through mutual funds.”