Is the US bailout working?

When the U.S. government announced an emergency plan to buy bad loans and other troubled assets from banks and financial institutions, it
was hailed as the best solution to tackle paralyzed credit markets.

Nearly a month later, the plan remains under wraps and money managers say it could have a fundamental flaw -- only a handful of the biggest investors are qualified to run the program.

When the plan won congressional approval on October 3, days after it was initially rejected, the Treasury Department said the program could be up and running within a few weeks.

It was designed as the core part of a $700 billion rescue package as it would root out toxic assets from the system, eliminating a key area of uncertainty for investors about when U.S. and global credit markets would be cleaned out and resume normal functioning.

But so far, no asset managers have been announced, suggesting that the government is running into difficulty in finding the most appropriate money managers for the job.

In order to compete for the contracts to buy and sell mortgage-backed securities (MBS) under the plan, companies must oversee at least $100 billion in U.S. dollar-denominated, fixed-income assets for clients.

Some investors say the $100 billion requirement shuts out many managers with decades of experience in MBS.

"The managers who have the assets under management to meet the minimum requirement have mostly proven to be incompetent in mortgage-backed securities," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles.

For example, Western Asset Core Bond's fund (WATFX) is down 13.25 percent this year, lagging the Lehman Brothers Aggregate index by 11.73 percentage points, according to data by Morningstar. Western Asset oversees $624 billion in fixed income assets.

Tad Rivelle, chief investment officer at Metropolitan West Asset Management in Los Angeles, which has $26 billion in fixed-income assets, added: "Why should we be deprived of the opportunity to participate? Perhaps we can be involved on a smaller scale. We manage multi-billion dollar portfolios. We have a $6 billion mutual fund...we can manage $6 billion."

For its part, TCW invests $130 billion in total assets, but only about $80 billion of that is in fixed-income, which disqualifies the company as a contender to help with the Troubled Asset Relief Program, known as TARP.

Gundlach is widely regarded as one of the best MBS specialists in the United States and has the record to back it up: his TCW Total Return fund (TGLMX) is the only one of its class to show any positive return this year in the intermediate-term bond category, which has been pummeled by the meltdown in corporate debt and MBS.

The major challenge for whomever manages the TARP will be to determine how much the Treasury would pay for the troubled mortgage assets, most of which have no or thin markets and are otherwise difficult to price because of their opaqueness and complexity.

"The logic of putting this minimum requirement parameter in place makes sense at a superficial level and certainly makes the weeding-out process easier. But it is excluding some managers with the most appropriate and proven skill sets," said Gundlach.

A Treasury spokeswoman had no immediate comment.

Source: EconomicTimes