updated 4/6/2009 7:23:43 PM ET 2009-04-06T23:23:43

The Treasury Department is making it easier for hedge funds and other private investors to participate in its plan for buying up banks' bad assets, an acknowledgment that the interest level so far has been lackluster.

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Analysts said the move shows the program hasn't yet attracted enough large fund managers who may be wary of congressional scrutiny or public backlash. The program's requirements also excluded too many smaller managers, they said.

The government is relying on private investors to purchase poorly performing real estate investments weighing on bank balance sheets.

Treasury on Monday relaxed a requirement that companies already manage at least $10 billion of the mortgage-backed securities to participate. A Treasury official said that only a few firms qualified under that criteria. The department also emphasized that the program is open to small and women- and minority-owned firms and said it will encourage such firms to partner with private asset managers.

"Clearly, they weren't getting the participation they needed," said Bernie McGinn, chief executive of McGinn Investment Management, a money manager based in Alexandria, Virginia.

Some fund managers are concerned about teaming up with the government in the aftermath of the firestorm over bonuses paid to executives at insurance giant American International Group Inc., which has received $182.5 billion in bailout funds. The House held hearings on the issue and approved legislation taxing the bonuses at 90 percent, though the measure hasn't become law.

"Investors are leery about getting involved with any government program, because they don't want to be very visible," said Steven Persky, managing partner and co-founder of Dalton Investments, a 10-year-old hedge fund specializing in distressed debt. "You don't want to be on the wrong side of a congressional investigation."

Douglas Elliott, a fellow at the Brookings Institution, said some smaller distressed debt funds would likely seek to buy the securities but don't meet the $10 billion requirement.

"There was a perceived unfairness," he said, in favor of larger companies. "It was starting to look like it might have been too narrow a group they were talking to."

Large banks such as Citigroup Inc., which have received billions in government bailout funds, could seek to buy toxic assets through the public-private partnership, though Treasury said it would consider a financial institution's "overall financial health and stability" before approving its application.

But McGinn noted that some large banks are more likely to sell assets into the program than buy.

Representatives from Citi and Morgan Stanley said those companies were evaluating the government partnership. A Goldman Sachs Inc. spokesman declined to comment.

The new guidance follows details of the public-private investment partnership announced by Treasury Secretary Timothy Geithner last month. The program will use government money and loans from the Federal Reserve to finance purchases by private investors of commercial and residential mortgage-backed securities from banks. A second part of the program will finance purchases of loans.

Geithner has said the initiative will use between $75 billion and $100 billion from the bank rescue fund.

The $10 billion asset requirement was one of three criteria the department listed for evaluating private investment managers when it announced the partnership. The other two are: a demonstrated ability to raise at least $500 million of new capital and experience in investing in mortgage-backed securities.

The three criteria will be viewed "holistically," the department said Monday, meaning firms won't have to satisfy all three.

The application deadline for private fund managers also was extended by two weeks until April 24.

Treasury officials plan to approve the first set of applications by May 15. Those managers would then raise capital, which Treasury has offered to match. The private firms also can borrow additional money from Treasury or the Fed.

The plan is that firms would then use that pot of money to purchase toxic assets from banks. Analysts estimate banks hold hundreds of billions of dollars in such assets that are causing them to hoard capital and pull back on lending.

The department also said it will consider opening the investment partnership to other assets besides mortgage-backed securities, but did not provide further details.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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