"Treasury Gets 36% Return Buying Toxic Mortgages From Banks in First Year" is the headline over a Bloomberg News dispatch that begins, "A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year. The eight funds created under the Public-Private Investment Program, or PPIP, reported net internal rates of return averaging 36 percent through Sept. 30, the Treasury Department said in a report this week. That compares with the 10 percent return for the Standard & Poor's 500 Index and 8.2 percent for the BarCap U.S. Aggregate Total Return Index of bonds."
The article leaves a few questions unanswered. If these securities went up 36% in price over a year, was it accurate to describe them as "toxic" in the first place? Since the program was initially touted by Treasury as "freeing up balance sheets of financial institutions and enabling the extension of new credit," wouldn't the financial institutions that got rid of the "toxic" stuff as they were encouraged to do by Treasury have been better off holding on to the stuff and reaping the 36% gains?
The program is relatively complicated. But the Bloomberg article seems to celebrate the 36% gain without asking how the person who sold the asset a year ago feels. Imagine this was an individual owned-house rather than a bank-owned security. You own a house and some buyer — not just any buyer, but the U.S. Government — comes along and says, "Nice house you've got there. But you know what, it's toxic! And you know what else, it's your lucky day, because I am willing to take it off your hands so you can clean up your balance sheet. I'll buy it from you for $100,000." Imagine the homeowner sells the house and invests the money in stocks or bonds (or, more realistically, in T-Bills paying virtually no interest that the government requires him to hold). Then imagine that a year later the government goes around boasting that the house is now worth $136,000. It's not a particularly good deal for the individual homeowner who sold the house.
And just to put an additional twist on things, in PPIP, it wasn't just the government who bought the "toxic" assets; the government did so in partnership with a bunch of large asset managers such as GE Capital and BlackRock who made a lot of money investing alongside the government.