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The Argument Against PPIP: Missing Leverage
In a letter to investors this week, Bridgewater Associates, a money-management firm with $71 billion of assets, said it would not participate in the Public Private Investment Program (PPIP), which the federal government hopes will reignite the capital markets. Bridgewater said PPIP has too many flaws and not enough leverage.
The letter was obtained by the New York Post. Here is an excerpt from the paper’s article today:
“When the program was first announced, we were originally interested” because the leverage the government was promising made the assets cheaper. “However, as things now stand, very little leverage is actually being offered via the ‘Legacy Securities Program,’ ” Dalio wrote, pointing out that the leverage offered is just 1-to-1.
He also blasted the program for its initial design, saying it is ripe for conflicts, pointing to the plan to hire five asset managers to run everything on behalf of themselves, the government and the other investors.
“The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out,” Dalio wrote.
Bridgewater’s investors include pension funds, endowments and foreign governments.
He also questioned the political risks that the program’s design could create, saying the limited number of managers “raises possibilities (or at least perceived possibilities) of them colluding because they all know each other.”
And so regardless of whether the investments make or lose money, “there will be reasons for politicians to complain and to focus on the five winners to see how they ‘abused’ the system,” he wrote.
Dalio’s criticism of the program is sure to raise eyebrows, as his firm is one of just a handful that would have likely met Treasury’s requirements for participation. What’s more, Dalio is widely regarded as an influential expert, and recently was named by Alpha Magazine as the fifth-best money maker in the hedge-fund world, behind George Soros.
To be sure, Dalio doesn’t slam everything about PIPP. Indeed, he doesn’t slam the legacy-loan program, in which investors buy loans instead of securities and offers leverage of between 6-to-1 and 12-to-1.
But, “we aren’t interested in illiquid loans,” he said in his note.
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