Fund to Let the Public Buy Assets in Distress

BlackRock's headquarters in New York.
Mark Lennihan
BlackRock's headquarters in New York.

Here is the latest pitch from Wall Street: those troubled assets at the banks could turn out to be gold for you.

That is the line from BlackRock, the giant money manager. BlackRock is putting together an investment fund that it says will give ordinary Americans a chance to profit from the financial bailouts that they are paying for. The company quietly filed plans on Friday to raise money for the vehicle.

For investors, the potential risks are considerable. The closed-end fund is to buy distressed mortgage securities from financial companies — the very investments that have hurt so many banks. It would be the first product aimed specifically at Main Street that is linked to the government’s now-diminished Public-Private Investment Program, which is meant to help purge these institutions of their worrisome investments.

If the BlackRock fund does well — that is, if the troubled home loans and commercial mortgages it buys recover in value — individual investors could profit from PPIP, pronounced P-Pip. The program has met with a tepid response from banks and others, in part because bankers say they believe the markets are stabilizing and are thus reluctant to sell their troubled investments.

If the housing and commercial real estate markets were to take a turn for the worse, of course, investors in the new fund could lose money.

The BlackRock fund, known as the BlackRock Legacy Securities Public-Private Trust, stemmed from discussions between the firm and the Obama administration about how to involve Main Street investors in the financial bailouts. None of the other bailout programs are open to individual investors.

The Pacific Investment Management Company, the big bond investment firm, had also held talks with the Treasury Department over setting up a retail fund. But Pimco withdrew its application to take part in PPIP last month.

Involving mom-and-pop investors might help quiet criticism that only the Wall Street elite stand to profit from the financial rescue programs. A spokesman for BlackRock declined to comment, citing a regulatory quiet period.

The prospectus filed with the Securities and Exchange Commission on Friday does not specify how big the BlackRock fund will be, but it will most likely be only a small stake alongside the many funds dedicated to the $1.5 trillion market for distressed mortgage securities. Most of the investment pools will be drawn from sophisticated investors like pension funds. BlackRock also plans to create an institutional fund to participate in PPIP.

In the past, BlackRock executives have stressed that any retail fund would have a low barrier to entry, though individual brokers who sell the product will determine the requirements for investors to participate. Based on other closed-end funds, it is possible the BlackRock product will require a minimum investment of $5,000 to $10,000.

BlackRock’s fund will combine the money it raises from investors with a matching equity contribution from the government, another feature meant to ensure that taxpayers will reap any upside from investments in these troubled securities.

The fund will then take advantage of special financing the government is making available to participants in PPIP, an amount of up to one-third of the fund’s assets. (The Treasury Department will also hold warrants in the fund, which will give it an additional small cut of any profits the fund makes.)

In an effort to mitigate the risk to investors, the fund will limit itself to securities backed by residential and commercial mortgages that were originally rated AAA by at least two ratings agencies before this year. BlackRock will halve its usual management fees for the fund.