Bridgewater Bows Out Of Toxic Asset Plan

Apr 2 2009 | 10:17am ET

In a dark omen for the U.S. government’s toxic assets plan, the world’s largest hedge fund manager says it will not participate in the program to buy mortgage-backed securities from banks.

Bridgewater Associates founder Raymond Dalio, in a note to investors, blasts Treasury Secretary Timothy Geithner’s Public-Private Investment Program as creating a “conflict of interest” for the five firms to be hired to run the assets, the New York Post reports. Just a week ago, Dalio had written investors to say it might join the program. At the time, Dalio raved about the “easy access to leverage” on offer, calling it “a heck of a deal” for buyers.

But he has changed his tune on that count.

“As things now stand, very little leverage is actually being offered via the ‘Legacy Securities Program,’” Dalio wrote in the new note, entitled, “Why We Decided Against Buying in the PIPP and Why We Doubt It Will Be Broadly Subscribed.” He said PIPP was offering just 1-to-1 leverage on the mortgage-backed securities, and that “we aren’t interested in the illiquid loans” for which the government is offering as much as 12-to-1 securities.

Dalio also said that the government plan to hire just five managers to run the toxic assets on behalf of both taxpayers and investors was seriously flawed.

“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, adding that the plan “raises possibilities (or at least perceived possibilities) of them colluding because they all know each other.”

Dalio said the plan also leaves the five managers at risk of attack.

“There will be reasons for politicians to complain and to focus on the five winners to see how they ‘abused the system,’” he wrote.

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