[img]456|left|||no_popup[/img] Garbage is good business.
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Just ask Tony Soprano or any self-respecting mobster.
If you think about it, garbage is the perfect business. Everyone always is throwing away something, and someone’s got to collect it.
Among the most lucrative aspects of the “waste management” biz is the collection and disposal of toxic garbage.
Just ask Goldman Sachs.
In conjunction with Treasury Secretary Tim Geithner’s program to help banks unload their toxic assets, Goldman Sachs has put itself in a position to collect the discarded paper at a deep discount. Goldman has raised a fund with about $5.5 billion in capital commitments to buy private-equity assets on the secondary market from endowments and pensions that have been stung by losses.
During the remaining months of 2009, investors may dump up to $130 billion in commitments at a very deep discount. Former investment banks like Goldman, as well as dozens of hedge funds, quickly are putting themselves in a position to take these troubled assets off their hands.
Treasury Standing Behind Deals
According to industry analysts, about $2.5 trillion of these assets may become available on the secondary market over the next two years.
To assure that firms like Goldman cut the best deals, a special Toxic Assets unit of the Treasury Department not only will broker the transactions but also underwrite most of the risk. With banks and other investor groups anxious to rid themselves of these toxic assets as soon as possible, buying these discarded financial instruments becomes a no-brainer for Goldman and funds of a similar ilk.
Although it’s a bit behind Goldman, J.P. Morgan Chase, the nation’s second biggest bank by assets also is getting into the act. To date, it only has raised about $500 million. But by the time the fire sale starts, their fund likely will rival Goldman’s.
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Goldman is not the only major investment firm putting itself in a position to take advantage of the government-backed rescue programs.
Newport Beach-based PIMCO (Pacific Investment Management Co.), the country’s largest bond management fund, quietly has been increasing its holdings of government debt. It’s Total Return Fund, which oversees $144 billion in assets, has upped its holdings of government debt in the form of Treasury bonds from 15 percent at the end of 2007 to nearly 28 percent in March. At the same time, the bond fund’s holdings of mortgage-backed securities have dropped to 66 percent of total assets from 86 percent in February.
As the Treasury Department gets set to complete its so-called stress tests of the country’s major banks, funds like PIMCO are anticipating an additional infusion of federal funds to keep the banks afloat.
How Treasury Stimulates
Over the past several months, the federal government has been scrambling to raise the needed cash by selling treasuries at a near record pace. As the recession has intensified, the market for U.S. debt has begun to dry up.
To bring buyers back to the table, Treasury is being forced to sweeten the pot by offering better returns. Other than the Federal Reserve, which announced in March that it would be buying up to $300 billion in U.S. debt, PIMCO is one of the few private funds in a position to do the same. By unloading billions from their portfolio of mortgage-backed securities before the market completely collapsed, firms like PIMCO quickly are becoming an investor of last resort for the federal government.
Bill Gross, PIMCO’s co-founder, is no different that the folks at Goldman or J.P. Morgan; he knows there’s gold in the garbage, and he’s willing to collect it.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
