BlackRock, Pimco Submit Bids for Treasury Bailout (Update2)

By Sree Vidya Bhaktavatsalam

Oct. 9 (Bloomberg) -- BlackRock Inc. and Pacific Investment Management Co. submitted proposals to manage troubled mortgage- backed securities in the biggest portion of the U.S. Treasury's $700 billion financial-rescue program, people familiar with the matter said.

State Street Corp., Bank of New York Mellon Corp. and Northern Trust Corp. bid to handle record-keeping and custody services for the Treasury, said the people, who asked not to be identified because the process is private. Northern Trust made a joint bid with NYSE Euronext, the owner of the New York Stock Exchange, the people said. The deadline for proposals was yesterday at 5 p.m. New York time.

President George W. Bush last week signed into law a measure authorizing the government to buy mortgages and other distressed assets from financial institutions buried by record home foreclosures. The goal is to remove illiquid assets from the books of banks and securities firms, making it easier for them to raise capital and resume lending.

Companies must oversee at least $100 billion in U.S. dollar- denominated fixed-income assets for clients to compete for the contracts to buy and sell mortgage-backed securities under the plan, according to criteria released Oct. 6 by the department. Bidders to provide custody services must oversee at least $500 billion in investor assets.

The Treasury, which solicited proposals from asset- management firms on Oct. 6, said it plans to make its selection by next week.

Treasury spokeswoman Jennifer Zuccarelli declined to comment. In a speech yesterday, Secretary Henry Paulson said the department could begin to hire private firms by the end of this week.

`Anxious' to Begin

The Treasury is ``anxious'' to begin buying mortgage assets, though it's unsure about how the plan will work, suggesting purchases will begin in six to eight weeks, UBS AG analysts said in an Oct. 7 report to clients.

The assets would likely be acquired through reverse auctions, in which the government would accept the lowest price offered by banks selling a type of asset. The Treasury expects the portfolio to hold assets until the markets improve, which it said may take months or years.

The UBS analysts said that ``many details remain to be hammered out,'' including prices and which assets would be bought first. The buying will probably start with originally AAA-rated securities backed by subprime or Alt-A home loans, in part because those prices have fallen the most, the analysts said. Alt-A loans were those made to borrowers who provided no proof of income. They rank between subprime and prime.

Selection Process

The Treasury has asked the fixed-income asset managers to describe in detail their ``expertise in the mortgage credit market and in managing distressed assets and mortgage-related assets,'' according to a notice posted on its Web site.

``Given the lack of industry benchmarks or indices for a portfolio of distressed assets, and the Treasury's stated policy goals, describe the most effective metric for measuring your performance as an asset manager for the Treasury,'' the notice said.

The Treasury also plans to select firms to manage residential and commercial mortgages. Officials have previously said the Treasury would like to hire five to 10 asset management firms, along with an in-house staff of about two dozen employees.

BlackRock, Pimco and Legg Mason Inc., the three biggest U.S. fixed-income managers, informally advised the Treasury prior to passage of the rescue package and planned to be bidders for the mortgage-backed securities portion, people familiar with the matter said last week. The three firms collectively manage about $1.9 trillion in fixed-income assets.

Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, declined to comment on whether the company submitted a bid.

Custody Leaders

Bank of New York Mellon is the world's largest custody bank, with more than $23 trillion in assets. The bank also invests more than $1.1 trillion in its fund unit. Boston-based State Street has $15.3 trillion in assets under custody and manages $1.9 trillion. Northern Trust has custody assets of $3.96 trillion and managed assets of $751.4 billion.

Bobbie Collins, a spokeswoman for New York-based BlackRock, declined to comment, as did Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, State Street's Hannah Grove, and Northern Trust's Doug Holt.

`Ready to Help'

``We stand ready to help the Treasury Department in a number of ways,'' BNY Mellon's Mike Dunn wrote in an e-mail yesterday, while declining to confirm whether the company put in a proposal.

``Our company was founded by the first secretary of the Treasury and we have developed a broad range of capabilities that could assist in the implementation and ultimate success of the program.'' Alexander Hamilton, who was Treasury secretary under George Washington, started Bank of New York in 1784.

The Treasury last month hired State Street and London-based Barclays Plc to manage a separate program to purchase mortgage- backed securities. State Street won a two-year contract that could be extended for up to three more years.

Pimco is separately in talks with the New York Fed regarding asset-management services for a new program the U.S. central bank is setting up to purchase commercial paper.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: October 9, 2008 17:03 EDT

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