SIGTARP-11-001 October 7, 2010

 

Selecting Fund Managers for the Legacy 

Securities Public-Private Investment Program
October 7, 2010

Selecting Fund Managers for the Legacy Securities PublicPrivate Investment Program

What SIGTARP Found

The Public-Private Investment Program (―PPIP‖) is designed to marry private capital 

with TARP funding to create individual investment funds, known as Public-Private 

Investment Funds (―PPIFs‖) that would purchase certain mortgage-backed securities. 

According to Treasury, the program was intended to ―restart the market for legacy 

securities.‖ 

SIGTARP found that Treasury constructed a reasonable architecture to accomplish its 

objective of identifying larger firms to manage PPIFs. It hired a law firm to assist in 

designing the application and establishing the selection criteria. In reviewing 141 

applications, it received assistance from other Government agencies and from an 

independent advisor with expertise in evaluating complex investments. Treasury 

conducted a multi-stage evaluation process, with each stage reducing the number of 

applicants moving to the next stage, and performed due diligence reviews. It also 

adequately documented the selection process. Treasury determined, and SIGTARP 

agrees, that the legal structure of PPIP did not require it to use the Federal Acquisition 

Regulation in selecting fund managers. 

While the selection process ultimately succeeded in creating nine privately managed 

funds with the means to purchase almost $30 billion in distressed assets, several 

aspects of the process are noteworthy:

Treasury’ published selection criteria created confusion and uncertainty among 

applicants. While Treasury published five criteria, it did not state how many of 

these criteria applicants were required to meet, or make clear how applicants 

could demonstrate that they met the criteria. 

While Treasury refined its criteria during the selection process, its public 

statements did not eliminate applicant confusion and its undisclosed change 

impaired the transparency of the process.

Treasury’s published selection criterion that fund managers have at least $10 

billion in assets under management risked unnecessarily discouraging 

applications from smaller asset managers that might have had significant 

expertise. The eventual size of PPIP and the fact that two-thirds of the selected 

managers failed to meet the threshold suggest that it was unnecessary. 

Treasury gave an advantage to larger applicants with respect to the requirement 

that applicants demonstrate a capacity to raise $500 million in private capital. Of 

13 applications that failed to make a statement on whether or not they would be 

able to raise the capital, Treasury passed the 10 that referenced $7.5 billion or 

more in total assets under management and rejected the three that referenced 

between $1 billion and $3 billion in assets. After the application process was 

completed, Treasury waived the $500 million threshold for the two PPIF 

managers that could not meet it, putting into question the significance of a 

criterion that more than half of the applicants were deemed not to have met.

In sum, while Treasury designed and adequately documented a reasonable selection 

process, the implementation of that process is vulnerable to criticism. First, the initial 

selection criteria created confusion among applicants, the subsequent clarification 

failed to remedy that confusion and was arguably misleading, and an undisclosed 

modification impaired transparency. Second, the emphasis on the size of potential fund 

managers, while perhaps understandable, not only threatened to discourage qualified 

applicants from applying but also, given the selections ultimately made, may have been 

unnecessary. As a result, the taxpayer may have lost the benefit of the participation of 

qualified, albeit smaller, fund managers because they were avoidably deterred from 

applying or unnecessarily rejected.

Finally, Treasury encouraged the applicants to form partnerships with small, veteran-, 

minority-and woman-owned private asset managers, which resulted in the inclusion of 

one or more minority-owned businesses in eight of the nine selected fund managers. 

But without guidance from Treasury on either the nature or the extent of the expected 

role of a minority partner, applicants were left to their own interpretation, which 

resulted in the minority-owned businesses largely participating to raise capital, with 

only two actually involved in managing assets, and one firm that appears to provide no 

assistance whatsoever. 

 

Summary of Report: SIGTARP-11-001

Why SIGTARP Did This Study

The Emergency Economic Stabilization Act 

(―EESA‖) of 2008 created the Troubled Asset Relief 

Program (―TARP‖) and provided the Secretary of the 

Treasury with authority to take actions to restore 

liquidity and stability to the U.S. financial system. 

The Department of Treasury (―Treasury‖) created the 

Legacy Securities Public-Private Investment 

Program (―PPIP‖) to increase liquidity by purchasing 

unmarketable securities clogging the books of 

financial institutions.

The Chairman and Ranking Member of the 

Subcommittee on Contracting Oversight, Senate 

Committee on Homeland Security and Governmental 

Affairs, requested that SIGTARP review Treasury’s 

selection of fund managers for PPIP. This study 

complements another planned SIGTARP audit that 

examines PPIP fund managers’ compliance programs 

to prevent fraud, waste, and abuse in executing the 

program. SIGTARP’s reporting objectives for this 

audit were to determine:

what criteria Treasury used to select the fund 

managers and their minority partners;

whether Treasury consistently applied its criteria 

in the selection of the fund managers; 

the extent that Treasury performed due diligence 

reviews on the fund managers and their minority 

partners; and

whether financial agreements between Treasury 

and the successful fund manager applicants were 

governed by the Federal Acquisition Regulation. 

In addition to the information presented in this 

report, SIGTARP has begun a separate audit to 

determine whether Treasury has established 

operational controls to prevent or mitigate conflicts 

of interest.

In commenting on a draft of this report, Treasury 

describes the audit’s summary of the fund manager 

selection process as informative and likely to be 

helpful in explaining that process to the public. 

Treasury also stated that it strongly disagrees with a 

number of the statements and conclusions regarding 

certain details of the fund manager selection process, 

but provided no detail on what its objections are. 

Given that Treasury had no material factual 

objections to the draft audit report, SIGTARP awaits 

a more detailed description of Treasury’s objections. 

A more complete description of Treasury’s response 

is included in the Management Comments and Audit 

Response section of this report.

SIGTARP

Office of the Special Inspector General

for the Troubled Asset Relief Program

Table of Contents

Introduction 1

Background 2

Selecting Fund Managers 7

Reviewing the Applications 9

Treasury Relaxes Requirement to Raise $500 million in 

Private Capital in 12 Weeks 19

TCW Withdraws as a Fund Manager 20

Treasury Encourages Fund Managers to Partner with Small Businesses

and with Firms Owned by Minorities, Women, and Veterans 21

Due Diligence on Pre-Qualified Fund Managers 25

Legal Due Diligence by Simpson Thacher & Bartlett LLP 25

Open-Source Investigations by Ennis Knupp & Associates, Inc. 26

Treasury Site Visits to Fund Managers 27

Application of the Federal Acquisition Regulation 29

Current PPIP Fund Status 31

Conclusions 32

Management Comments and Audit Response 35

Appendices

Appendix A: Scope and Methodology 36

Appendix B: Selection Process Timeline 38

Appendix C: Management Comments 39

Appendix D: Audit Team Members 40

Appendix E: Acronyms 41
1

Introduction

The Emergency Economic Stabilization Act of 2008 (―EESA‖) created the Troubled Asset Relief 

Program (―TARP‖) and authorized the Secretary of the Treasury to purchase troubled assets 

from financial institutions1in an attempt to restore liquidity and stability to the financial system. 

Among many efforts to achieve this end, the Department of the Treasury (―Treasury‖) launched 

the Public-Private Investment Program (―PPIP‖) on March 23, 2009. Under PPIP, Treasury 

matches private capital with TARP funds, and provides additional secured loans for up to 100%

of the combined amount of the private and TARP capital investments. On March 23, 2009, 

Treasury announced that the program was designed to maximize the impact of each taxpayer 

dollar, share risks and profits with private-sector participants, and create a mechanism to 

determine market prices for troubled assets held by banks. According to Treasury, PPIP’s aim 

was to ―restart the market for legacy securities, allowing banks and other financial institutions to 

free up capital and stimulate the extension of new credit.‖

Treasury conducted a multi-stage review of 141 applications for fund manager positions and prequalified nine companies to serve as managers of individual Public-Private Investment Funds 

(―PPIFs‖), contingent on the companies each raising at least $500 million in private capital, 

among other conditions. Subsequently, Treasury dissolved the partnership with one fund 

manager and liquidated the fund’s assets after the departure of the company’s Chief Investment 

Officer. There are currently eight fund managers operating PPIFs, and the combination of 

capital from the private sector and Treasury has resulted in $29.4 billion in total purchasing 

power for PPIP, consisting of $7.35 billion of private capital, $7.35 billion of matching TARP 

capital, and $14.7 billion in non-recourse TARP loans made to the eight PPIFs. By the terms of 

their agreements with Treasury, the funds will exist for eight years, but under certain 

circumstances Treasury can terminate them early or extend them up to two additional years.

Senator Claire McCaskill, Chairman of the Homeland Security and Governmental Affairs 

Committee’s Subcommittee on Contracting Oversight, and Senator Robert Bennett, Ranking 

Member of the Subcommittee, raised concerns about Treasury’s selection of fund managers and 

 

1 EESA defines the term financial institution as ―any institution, including, but not limited to, any bank, savings 

association, credit union, security broker or dealer, or insurance company, established and regulated under the laws 

of the United States or any state, territory, or possession of the United States.‖

Selecting Fund Managers for the Legacy Securities PublicPrivate Investment Program

SIGTARP 11-001 October 7, 2010 
2

their partners. In a joint letter, Chairman McCaskill and Senator Bennett asked SIGTARP to 

review a number of issues related to the PPIP. Our reporting objectives were to determine:

what criteria Treasury used to select the fund managers and their minority partners;

whether Treasury consistently applied its criteria in the selection of the fund managers; 

the extent that Treasury performed due diligence reviews on the fund managers and their 

minority partners. In addition to the information presented in this report, SIGTARP has 

begun a separate audit to determine whether Treasury has established operational 

controls to prevent or mitigate conflicts of interest; and

whether financial agreements between Treasury and the successful fund manager 

applicants were governed by the Federal Acquisition Regulation. 

For a discussion of our scope and methodology for this audit, see Appendix A.

Background

In the fall of 2008, the U.S. financial markets were in crisis. The dramatic downturn in the 

housing market led to an abrupt decline in the price of financial assets associated with housing. 

The value of mortgage-backed securities, particularly those based on subprime loans, declined 

precipitously as the housing boom ended and the financial crisis unfolded. As loan 

delinquencies increased and housing prices decreased, mortgage-backed securities began losing 

value and financial institutions were left holding ―toxic‖ mortgages and/or securities that were 

increasingly difficult to value, illiquid, and potentially had little worth. Many investors exited 

the mortgage-backed securities markets as prices continued to decline or became illiquid, 

freezing the markets for these assets. The banking system was under severe stress as the rapid 

decline in valuations of the residential and commercial real estate, along with increasing 

incidents of defaults on those loans, caused sharp decreases in the values of the loans and the 

related mortgage-backed securities on banks’ balance sheets. 

Some institutions found themselves so exposed that they were threatened with failure, and some 

failed, because they were unable to raise needed capital as the value of their portfolios declined. 

Testifying before Congress in September 2008, then Secretary of the Treasury Henry M. Paulson 

Jr. stated that the continued failures of these institutions and frozen credit markets threatened 

―American families’ financial well-being, the viability of businesses both small and large, and 

the very health of our economy.‖ In response to the continuing and growing economic crisis, the 

U.S. and other governments sought to implement even more aggressive plans to address the 

stresses on their financial institutions and the turmoil in the global financial markets. The 

governments of the United Kingdom, Germany, France, Canada, Ireland, and Sweden either 

provided liquidity or capital injections to their financial institutions. 

On September 20, 2008, the Secretary of the Treasury proposed to Congress that Treasury 

purchase up to $700 billion of distressed assets as a relief measure. On October 3, 2008, the 

Emergency Economic Stabilization Act of 2008 created the Troubled Asset Relief Program and 

authorized Treasury to purchase troubled assets from financial institutions in an attempt to 
3

restore liquidity and stability to the financial system. EESA also required Treasury to publish 

procedures for selecting asset managers for these distressed assets, which Treasury did in early 

October 2008.

Treasury initially proposed a program to use TARP funds to purchase troubled assets directly 

from financial institutions. On October 6, 2008, Treasury issued a solicitation inviting 

investment firms to apply for the job of managing the troubled assets that Treasury would seek to 

purchase through its new authority, with Bank of New York Mellon acting as a financial agent to

purchase the assets. To be considered for an asset manager position, investment firms had to 

have a minimum of $100 billion in assets under management and a track record of at least ten 

years of experience managing fixed income assets, among other requirements. After reviewing 

108 applications, Treasury noted in an internal memo dated October 29, 2008 that it had decided 

on six companies.

2 Although Treasury subsequently decided not to implement this program, 

four of the six selected companies were later selected as PPIF managers. 3 

Former Secretary of the Treasury Paulson and Federal Reserve Chairman Ben S. Bernanke 

explained to SIGTARP that with conditions continuing to deteriorate in late 2008, there was not 

enough time to spend months purchasing distressed assets as originally intended. Treasury opted 

instead to provide TARP capital to ailing financial institutions.

4

 On November 12, 2008, 

Secretary Paulson stated:

During the 2 weeks that Congress considered the legislation, market 

conditions worsened considerably. It was clear to me by the time the bill 

was signed on October 3rd that we needed to act quickly and forcefully, 

and that purchasing troubled assets – our initial focus – would take time to 

implement and would not be sufficient given the severity of the problem. 

In consultation with the Federal Reserve, I determined that the most 

timely, effective step to improve credit market conditions was to 

strengthen bank balance sheets quickly through direct purchases of equity 

in banks.

 

2 Treasury hired Ennis Knupp & Associates (―Ennis Knupp‖), a Chicago-based investment consultant, to act as an 

independent advisor for this process of selecting asset managers, but Treasury terminated the plan to purchase 

distressed assets before it was implemented. Ennis Knupp ensured that applications and program documents were 

submitted in a timely fashion and provided input on applicants based on its own database of information on fixed 

income asset managers. In March 2009, Treasury issued a task order to its existing contract with Ennis Knupp to 

have the company assist in the PPIP fund manager selection process. The work conducted by Ennis Knupp is 

discussed in greater detail later in this report.

3 According to Treasury, none of the Treasury staff members directly involved in PPIP were involved with the 

original 2008 solicitation and the PPIP selection process was not based on the documents related to this process, 

although there are many similar characteristics, such as the requirements for past performance of the fund 

managers.

4

For more information on the decision to provide capital infusions and the economic crisis of 2007-2008, see 

SIGTARP’s audit report on ―Emergency Capital Injections Provided to Support the Viability of Bank of America, 

Other Major Banks, and the U.S. Financial System,‖ SIGTARP-10-001, October 5, 2009.
4

The direct purchase of bank equity to which Secretary Paulson referred was the beginning of 

Treasury’s Capital Purchase Program (―CPP‖), which directly infused capital into ailing financial 

institutions. While the injection of TARP funds helped shore up banks’ balance sheets, the 

market for mortgage-backed securities remained illiquid. 

On February 10, 2009, Treasury announced a Financial Stability Plan and established PPIP, 

which, as announced, would facilitate the purchase of up to $1 trillion in distressed assets

through a combination of public and private financing. This was different from the original plan 

to purchase troubled assets using only TARP funds.5 According to Treasury, private sector 

participation was a key aspect of the overall Financial Stability Plan. A Senior Advisor to the 

Secretary of the Treasury told SIGTARP that in the four months following EESA’s passage, 

Treasury concluded that the private sector needed to have ―skin in the game‖ in order to provide 

an investor base that would establish a true market value for the distressed assets. 

Between February 10, 2009, and the beginning of the PPIP fund manager application process on 

March 23, 2009, Treasury officials held conversations with private investment firms BlackRock,

Inc. (―BlackRock‖), Pacific Investment Management Company, LLC (―PIMCO‖), and The Trust 

Company of the West Group, Inc. (―TCW‖) to seek advice on the structure of the planned 

program that would later be called the Legacy Securities Program.6 Treasury told SIGTARP that 

it consulted the companies on the market feasibility of different proposed structures for the 

Legacy Securities Program, including the size of the program and the amount of capital that 

could feasibly be raised from the private sector for such an effort, and the relative impact of 

differently sized programs on illiquid securities markets. Treasury officials told SIGTARP that it 

contacted these three firms because each had successfully developed distressed asset funds and 

raised private capital for their own investors similar to the funds Treasury envisioned for PPIP.7 

Treasury did not document its communications with the three firms. 

On March 23, 2009, Treasury announced the details of the Legacy Securities PPIP and posted an 

application form for potential fund managers on its website. Treasury’s announcement stated 

that ―By providing the financing the private markets cannot now provide, this will help start a 

market for the real estate-related assets that are at the center of this crisis. Our objective is to use 

private capital and private asset managers to help provide a market mechanism for valuing the 

assets.‖

 

5

For the purposes of PPIP, eligible assets are residential and commercial mortgage-backed securities secured 

directly by actual mortgages, leases, or other assets, and not other securities that were issued before January 1, 

2009, and originally rated AAA (or an equivalent rating) by two or more nationally recognized statistical rating 

organizations.

6 Treasury originally intended PPIP to purchase both legacy securities and legacy loans from financial institutions; 

however, it did not implement the legacy loan part of the program. This report focuses on the Legacy Securities 

part of PPIP and uses the terms PPIP and Legacy Securities Program interchangeably.

7 All three firms that Treasury consulted in the program design made it to the Finalist Stage (as discussed later in this 

report) of the PPIP fund manager selection process, with two of them, BlackRock and TCW, being selected and 

the third, PIMCO, withdrawing its application.
5

Under the Legacy Securities Program, Treasury would match private capital with TARP funds, 

and would provide additional non-recourse8secured loans for up to 100% of the combined 

amount of private and TARP capital investment. In other words, for every dollar in private 

capital raised, TARP would provide $1 in additional capital and up to $2 in debt financing. In its 

solicitation, Treasury noted that it expected each fund manager to raise at least $500 million in 

private funds, and to meet other conditions, including governance and fund management 

requirements. The funds would be used to purchase eligible assets from financial institutions, 

which were defined as certain residential mortgage-backed securities (―RMBS‖) and commercial 

mortgage-backed securities (―CMBS‖). For the purposes of PPIP, eligible assets:

are issued before January 1, 2009 (legacy);

bear an original AAA rating, or equivalent, from two or more credit rating agencies 

designated as nationally recognized statistical rating organizations;

are secured directly by actual mortgages, leases, or other assets, and not other securities

(other than certain swap positions, as determined by Treasury);

are located primarily in the United States (the loans and other assets securing the nonagency RMBS and CMBS); and

are purchased from financial institutions eligible for TARP participation.

Treasury’s March 23, 2009 PPIP announcement stated that PPIP would use $75 billion to $100

billion of TARP funds, alongside capital from private investors to buy legacy assets. In creating 

PPIP, Treasury announced that the program was intended to:

maximize the impact of each taxpayer dollar,

share risks and profits with private-sector participants, and

create a mechanism to determine market prices for troubled assets held by banks or 

financial institutions.

According to Treasury, ―the investment objective of PPIP is to generate attractive returns for 

taxpayers and private investors through long-term‖ investments. Each PPIF has a three-year

investment period to use the combined government and private funds to invest and trade in 

eligible assets on behalf of its private and Government investors. After three years the fund 

managers may sell the securities or hold them for an additional five years, with the possibility of 

up to two years of extensions, unless the PPIF is dissolved at an earlier date. Treasury officials 

told SIGTARP that the ―long-term buy and hold strategy‖ would promote greater stability in the 

market for commercial and non-agency residential mortgage-backed securities.

 

8 Non-recourse indebtedness is generally a type of loan that is secured by collateral but, if the borrower defaults, the 

lender may only foreclose on the collateral for purposes of repayment and cannot turn to the borrower for any 

further repayment, even if the value of the collateral does not cover the full value of the defaulted amount.
6

Treasury received 141 fund manager applications and conducted a multi-stage evaluation of 

them, whittling down the number of applicants in each successive stage. On July 8, 2009, 

Treasury pre-qualified the following nine companies to become fund managers, subject to, 

among other conditions, the ability of each firm to raise $500 million in private capital.

1. AllianceBernstein, L.P. and its sub-advisors Greenfield Partners, LLC and Rialto Capital 

Management, LLC (―AllianceBernstein‖);

2. Angelo, Gordon & Co., L.P. and GE Capital Real Estate; (―Angelo, Gordon/ GE 

Capital‖);

3. BlackRock, Inc. (―BlackRock‖);

4. Invesco Ltd. (―Invesco‖);

5. Marathon Asset Management, L.P. (―Marathon‖);

6. Oaktree Capital Management, L.P. (―Oaktree‖);

7. The Trust Company of the West Group, Inc. (―TCW‖); 

8. Wellington Management Company, LLP (―Wellington‖) ; and

9. RLJ Western Asset Management L.P. (―RLJ Western Asset‖).9

 

9 RLJ Western Asset Management L.P. is an entity formed as a joint venture between the RLJ Companies LLC and 

Western Asset Management Company.
7

Selecting Fund Managers

This section describes the creation of the PPIP fund manager application, the criteria used to 

evaluate the applications, how the submitted applications were reviewed, and how firms were 

selected or rejected.

Between the announcement of the Financial Stability Plan on February 10, 2009, and the formal 

announcement of the application process for PPIP fund managers on March 23, 2009, Treasury, 

with the assistance of its external counsel, Simpson Thacher & Bartlett LLP (―Simpson 

Thacher‖),10 designed the PPIP fund manager application and established the selection criteria. 

While separate processes, the application and criteria had similarities to the solicitation that 

Treasury published in October 2008, when it was initially considering the direct purchase of 

distressed assets. Both solicitations required applicants to provide, among other items, 

information on their organizational structure, staffing, fund management personnel, total assets 

under management, past performance in managing funds, references from customers, 

performance measures, risk management strategies, planned oversight of the fund, and 

descriptions of real or potential conflicts of interest. Treasury ultimately approved the 

application’s design and the initial selection criteria, and published the PPIP application on its 

web site on March 23, 2009.

Treasury’s PPIP application stated that fund managers would be pre-qualified based upon core 

criteria ―anticipated‖ to include:

Demonstrated capacity to raise at least $500 million of private capital;

Demonstrated experience investing in eligible assets, including performance track

records;

A minimum of $10 billion (market value) of eligible assets currently under management;

Demonstrated operational capacity to manage the funds in a manner consistent with 

Treasury’s stated investment objective while also protecting taxpayers; and

Headquarters in the United States.

According to a Treasury official, the asset and capital amounts in the stated criteria were 

―ballpark‖ figures that would demonstrate that an applicant had significant experience in raising 

capital and with managing the assets that would be purchased under PPIP. The PPIP application, 

at the time of its release, did not state how many of these criteria had to be met or how applicants 

could demonstrate that they met the criteria. Some applicants told SIGTARP that they found 

these criteria to be vague or excessive, and that they sent emails to Treasury commenting on the 

 

10 Simpson Thacher states that it has extensive experience providing legal advice on financial services. On February 

20, 2009, Treasury hired Simpson Thacher to assist in constructing the PPIP fund manager application and 

subsequently conducting legal due diligence on the pre-qualified fund managers.
8

application’s requirements or requesting clarification. For example, a number of potential 

applicants raised concerns regarding the requirement that they have a minimum of $10 billion in 

―eligible assets‖ under management, particularly given the distressed state of the eligible asset 

markets. These emails included such comments as:

―After spending a fair amount of time reviewing your application, we determined that we 

would not qualify to meet the criteria of ―a minimum of $10 billion (market value) of 

Eligible Assets currently under management‖ [however,] we feel that we have an 

expertise in managing CMBS and RMBS. We respect the time of the Treasury and we 

do not want to submit an application if we fall short of this minimum criteria yet we feel 

strongly that we could be a valuable manager in this program. Would you recommend 

we fill this application out even though we do not meet the minimum $10 billion 

threshold?‖

―Could you please provide some indication as to whether the AUM [Assets Under 

Management] and performance track record relate solely to Eligible Assets or if Treasury 

would accept a manager with similar asset types ... or assets that consist of securities 

backed by RMBS (Residential Mortgage-Backed Securities) or CMBS (Commercial 

Mortgage-Backed Securities), such as CDOs (Collateralized Debt Obligations) for 

purposes of being pre-approved. Also, if a potential fund manager manages less than $10 

billion of Eligible Assets, is there any chance that those fund managers would be 

considered?‖

One finalist with less than the required amount of eligible assets under management told 

SIGTARP that the application was vague. The applicant had ―a suspicion that the program was 

oriented towards two to three large asset management firms‖ because of the requirement to have 

$10 billion in eligible assets under management. A fund manager official told SIGTARP that the 

$10 billion in eligible assets criterion was a ―mistake‖ because, in his opinion, companies of that 

size had caused the economic crisis in the first place. Ennis Knupp, the contractor Treasury 

hired to assist it in reviewing the applications, also considered the $10 billion requirement to be 

an ―onerous hurdle to clear.‖ It told SIGTARP that based on its experience as an investment 

consultant and on the email comments that Treasury received, only a limited number of 

applicants could meet this threshold.11 Ultimately, six of the nine selected fund managers did not 

meet the $10 billion eligible asset threshold.

Treasury officials acknowledged that its selection criteria favored larger asset managers, but 

explained that they sought managers who had a capacity to raise sizeable amounts of equity from 

investors, a demonstrated track record of managing distressed assets of a type targeted by the 

program, and a degree of organizational stability. They added that when they announced the 

program they had originally planned to select approximately five large fund managers. The 

original application deadline was April 10, 2009, but by April 6, 2009, Treasury had received 

 

11 Some of the inquiries expressing concerns about the $10 billion requirement came from firms that ultimately did 

not apply.
9

only four applications, two of which were determined to be incomplete and were rejected during 

the initial stage of review. The other two applications were changed and resubmitted prior to the 

deadline, and were rejected by Treasury during subsequent stages in the review process. On that 

same day, Treasury published in its Frequently Asked Questions (―FAQs‖) that it would review 

the applications received based on the criteria outlined above and that more than five fund 

managers may be selected depending on the number of qualified applications it received. 

Treasury eventually selected nine fund managers. 

Treasury also conveyed to applicants in its FAQs that the five criteria would be evaluated with a 

―holistic‖ approach in which ―failure to meet any one criteria will not necessarily disqualify a 

proposal.‖ Treasury officials told SIGTARP that as the criteria were inter-related, they allowed 

applicants to proceed through the selection process on the ―holistic‖ assessment of their abilities

rather than the ability to fail or meet a single criterion. The officials added that the fact that some 

of the applicants were allowed to proceed and were eventually pre-qualified without meeting all 

five criteria demonstrated Treasury’s ―holistic‖ assessment of each application.

In the April 6, 2009 FAQs Treasury also extended the application submission deadline to April 

24, 2009. Treasury received a total of 141 fund manager applications by the April 24, 2009, 

deadline.

Reviewing the Applications

On April 24, 2009, Treasury established a seven-person PPIP Evaluation Committee 

(―Evaluation Committee‖) — five voting members and two non-voting members12 — to review 

the 141 applications it received from prospective fund managers and make a recommendation to 

the TARP Investment Committee, which had ultimate authority to approve pre-qualification of a 

fund manager.

13

 On the same day, the Evaluation Committee issued a Legacy Securities 

Program internal memorandum detailing the stages of the evaluation process to review the 

applications and a timeline for completing the selection process. Treasury also engaged Ennis 

Knupp to assist in the review process.

Throughout the fund manager selection process, the Evaluation Committee thoroughly 

documented its decisions to select or reject applicants in Stage memoranda. The Evaluation 

Committee conducted a multi-stage evaluation of the 141 fund manager applications, with each 

 

12 The two nonvoting members were Treasury legal and compliance employees. The voting members included three 

Treasury employees, one employee of the Export-Import Bank and one employee of the Overseas Private 

Investment Corporation (―OPIC‖). OPIC is an agency of the U.S. government that helps U.S. businesses invest 

overseas, fosters economic development in new and emerging markets, and complements the private sector in 

managing risks associated with foreign direct investment. According to Treasury, none of the members of the 

Evaluation Committee or the TARP Investment Committee was involved in earlier discussions with PIMCO, 

BlackRock and TCW or involved in the design of the Legacy Securities Program before the release of the 

application.

13 The TARP Investment Committee includes Treasury’s Chief Investment Officer for the TARP, who chairs the 

committee, as well as top officials on financial markets, economic policy, financial institutions, and financial 

stability.
10

stage reducing the number of applicants moving to the next stage. In Stage 1, the Evaluation 

Committee removed 37 applications that were ―duplicates‖14 or were found to be ―nonresponsive.‖15

 In Stage 2, the Evaluation Committee excluded 58 of the remaining 104 

applicants because they did not meet two or more of the five selection criteria. For Stage 3, the 

46 remaining applicants were evaluated ―based on relative attractiveness of their applications, 

based on the five categories of criteria‖ and placed into one of three tiers. The Evaluation 

Committee selected 19 of those 46 applicants for the Finalist Stage review.

In the Finalist Stage review, the Evaluation Committee evaluated the 19 remaining applicants 

against each other in terms of their ability to best fulfill PPIP’s investment objectives, which

included restoring liquidity and establishing fair market prices for the eligible assets. 

Throughout the process, the Evaluation Committee and Ennis Knupp reviewed and analyzed the 

applications and prepared documentation supporting the decisions to select or reject applicants. 

Following the selection stages, Treasury, Ennis Knupp, and Simpson Thacher conducted due 

diligence reviews of each of the nine remaining fund managers and their minority partners. 

These reviews are discussed in the section below on ―Due Diligence on Pre-Qualified Fund 

Managers.‖ Ultimately, Treasury selected nine companies from the 19 remaining applicants to 

become fund managers, subject to a number of conditions, including that they each raise $500 

million in private capital. See Appendix B for an illustration of the stages and timeline for the 

fund manager selection process. The results of each stage are discussed in more detail below.

Stage 1

Treasury’s Legacy Securities Program evaluation process memorandum stated that the purpose 

of this stage was to identify and exclude applications that were non-responsive or were 

duplicates, as defined by the Evaluation Committee. 16 On May 1, 2009, the Evaluation 

Committee completed its Stage 1 review of the 141 fund manager applications and rejected 18 

applications as being duplicates and 19 as being non-responsive. For example, over half of the

applications that were deemed non-responsive did not contain answers to questions on assets 

under management, past performance, limited partner references and questions that focused on 

the applicants’ proposed fund structure and investment strategy. The Evaluation Committee

accepted 104 applications to move on to the Stage 2 review.

As part of this audit, SIGTARP independently reviewed all 141 applications for non-responsive 

and duplicate submissions. Following the independent review of these applications, SIGTARP 

compared its list of non-responsive submissions and notes with Treasury’s list to determine if 

there were discrepancies. Discrepancies were resolved through subsequent SIGTARP meetings 

 

14 A ―duplicate‖ is a submitted application that is the same or very similar to another application from the same 

applicant. Treasury accepted the duplicate application with the latest date stamp, unless the applicant withdrew its 

application prior to the submission deadline.

15 The Evaluation Committee defined ―non-responsive‖ as an application that (1) did not include required 

information related to the five core criteria by the Evaluation Committee, or (2) was not submitted by the deadline 

date. Applicants were not allowed to re-submit or remediate their applications subsequent to the deadline date.

16 In some instances, companies submitted applications in both hard and electronic copies; however, only the latest 

application received was reviewed by the Evaluation Committee and Ennis Knupp.
11

with Treasury. SIGTARP confirmed that the 18 applications that Treasury classified as duplicate 

were submitted at least twice and the 19 non-responsive applications did not contain answers for 

key information required by Treasury. SIGTARP was satisfied that the remaining 104 submitted 

applications met the requirements for this stage.

Stage 2

Treasury’s Legacy Securities Program evaluation process memorandum stated that in this stage, 

the Evaluation Committee’s aim was to ―identify applicants that should be excluded based on a 

―holistic‖ review of the criteria.‖ The criteria established in the application and considered in 

this stage were: 

1. Demonstrated capacity to raise at least $500 million of private capital.

2. Demonstrated experience and a performance track record investing in eligible assets.

3. A minimum of $10 billion (market value) of eligible assets under management.

4. Demonstrated operational capacity to manage the funds in a manner consistent with 

Treasury’s stated Investment Objectives while also protecting taxpayers.

5. Headquartered in the United States.

Treasury did not use the term ―holistic‖ in the application forms but rather in responses to FAQs 

posted on Treasury’s website on April 6, 2009. Treasury stated in the FAQs that ―These criteria 

will be viewed on a ―holistic‖ basis and it is anticipated that failure to meet any one (1) [of the 

above criteria] will not necessarily disqualify [an application].‖ However, the Evaluation 

Committee’s internal memorandum detailing the stages of the evaluation process stated that 

―failure to meet any two (2) of the five (5) eligibility criteria shall disqualify an application.‖ 

Treasury did not disclose this fact to any applicant or the public.

The Evaluation Committee’s internal memorandum on Stage 2 provided additional grading 

guidelines for the evaluators to assign passing grades for each of the five criteria. These 

guidelines were also not disclosed to the applicants. The grading guidelines stated:

Criteria 1 — Demonstrated capacity to raise at least $500 million of private capital.

o Applicant must demonstrate ability to timely raise $500 million either through 

fundraising track record or a proposed plan.

o Applicant cannot state it will be unable to raise $500 million.17

Criteria 2 — Demonstrated experience investing in eligible assets, including through 

performance track records.

 

17 This was a new guideline that the Evaluation Committee, in conjunction with discussions with Ennis Knupp, used 

to evaluate and implement Criteria 1. 
12

o Applicant must provide specific examples of relevant experience investing in a 

substantial amount18 of eligible assets (e.g., track record, description of prior 

investment experience, investment process, etc.).

Criteria 3 — A minimum of $10 billion (market value) of eligible assets (as defined in 

the fund manager application) under management.

o Applicant must provide evidence of meeting this minimum threshold (e.g., by stating 

the value of eligible assets in the application).

Criteria 4 — A demonstrated operational capacity to manage the funds in a manner 

consistent with Treasury’s stated investment objective while also protecting taxpayers. 

o Applicant must have a total of at least $1 billion of assets under management, 

including but not limited to eligible assets.19

o Applicant must describe its organization with respect to risk management, 

compliance and investment strategy consistent with eligible assets and/or Treasury’s 

stated investment objective.

Criteria 5 — Headquartered in the United States. 

o Applicant must be established, licensed, and maintain a presence in the United States. 

However, applicants’ ultimate parent company need not be headquartered in the 

United States.

Although Treasury’s application required applicants to provide details on their fundraising track 

records or credible plans to raise $500 million, in practice it deemed this criteria had been met as 

long as an applicant did not affirmatively confirm that it would be unable to raise a minimum of 

$500 million. This meant that firms that did not specifically state that they were unable to meet

this criterion, as long as they responded to the fundraising criterion, were deemed in compliance 

and allowed to pass this stage of the selection process, while those that disclosed that they would 

be unable to raise that sum of money were rejected. For example, one applicant, that stated that 

it ―would endeavour to raise approximately $250 million,‖ passed this criterion. 

The Evaluation Committee’s Stage 2 memorandum specified that in order to demonstrate 

operational capacity (criterion 4), an applicant must have at least $1 billion in total assets under 

management. This was the first mention of the $1 billion total assets requirement; it was not in 

the application and Treasury did not disclose this criterion to applicants in its published FAQs. 

Furthermore, the Evaluation Committee deemed that any applicant who failed to meet this 

criterion would automatically be rejected because it would also not meet the separate criterion of 

at least $10 billion in eligible assets under management. Thus, all applicants that passed Stage 2 

had at least $1 billion in total assets under management and any applicant that failed to meet this 

threshold was rejected. Evaluation Committee members told SIGTARP that this threshold was 

 

18 The Evaluation Committee did not quantify its term ―substantial amount.‖

19 This was a new part of criterion that was not listed in the application. Over 40% (43 of 104) of the applicants 

reviewed in this stage had total assets under management of less than $1 billion. 
13

established because $1 billion was the minimum amount that would be managed if an investment 

firm were pre-qualified to manage a PPIF (i.e., the sum of $500 million that fund managers are 

required to raise and $500 million matched by Treasury). Treasury told SIGTARP that in 

consultation with Ennis Knupp, Treasury determined that there was a significant risk to 

providing capital that would, at a minimum, double the size of firms that did not have a history 

of managing this level of capital or raising capital of this magnitude.

For this audit, SIGTARP independently assessed whether each of the 104 applicants that 

advanced to Stage 2 had met Treasury’s five criteria. SIGTARP compared its findings with the 

Evaluation Committee’s Stage 2 results, highlighted any grading discrepancies, and sought 

clarification from the Evaluation Committee. SIGTARP asked the Evaluation Committee how 

they evaluated the applicants’ responses relative to its selection criteria. Based on SIGTARP’s 

independent review and conversations with the Evaluation Committee, SIGTARP found that the 

Evaluation Committee’s assessment of applications involved considerable subjective judgment. 

While several of the criteria, such as the amounts of eligible assets under management, could be 

objectively evaluated, other criteria were not clearly defined. This left members of the 

Evaluation Committee broad discretion in deciding whether an applicant advanced to the next 

stage. According to Treasury, it used Ennis Knupp, an expert fund advisor consultant with 

extensive experience in evaluating fund managers to provide input and advice with respect to 

rendering these decisions. Treasury added that a decision was made by the five Evaluation 

Committee members with input from Legal and Compliance members as well as Ennis Knupp.

SIGTARP indentified an area in Stage 2 where Treasury appears to have given an advantage to 

larger applicants with respect to the requirement that applicants demonstrate an ability to raise 

$500 million in capital. In practice, Treasury generally deemed applicants that affirmatively 

stated that they could raise at least $500 million in capital for the PPIF to have passed this 

criterion, while failing those that affirmatively stated that they would be unable to do so. 

Thirteen applicants considered in Stage 2 were not covered by this practice because they failed to 

make a statement on the subject one way or the other. Ten of the 13 applications referenced at 

least $7.5 billion in assets under management while the other three referenced between $1 billion 

and $3 billion in assets. 20 In the absence of governing guidance or practice, Treasury deemed the 

10 largest applicants to meet this criterion while finding that the three smallest did not. One of 

these 13 applicants stated in its application that it ―has a long history of raising assets within the 

public marketplace in a timely fashion,‖ but unlike the other 12 applicants, it did not provide any 

information directly addressing, even generally, its capacity to raise $500 million in private 

capital. As a result, it appeared more clearly than any of the other 12 to fail Treasury’s Criterion 1,

both as described in the application and as refined in Treasury’s internal Stage 2 guidance. 

Nonetheless, the Evaluation Committee passed the applicant on this criterion based on its 

assessment that ―the size of the firm and scope of fundraising resources indicate that the 

applicant has the capacity to raise $500 million in private capital for the PPIP program,‖ even 

though the Committee noted in its memorandum that the applicant did not specifically state how 

much capital it could raise. In other words, while the applicant failed to provide information 

 

20 One of the ten applications that referenced at least $7.5 billion included a proposed partnership between two firms 

with $1.3 billion and $27 billion in total assets under managements, respectively.
14

demonstrating its capacity to raise $500 million in private capital, Treasury, on its own, 

concluded that the applicant had that capacity based chiefly on the applicant’s size. Treasury 

informed SIGTARP that it viewed its passing this applicant on this criterion is an example of its 

use of the ―holistic‖ assessment approach, where it concluded the applicant warranted further 

consideration due chiefly to its large size (more than $400 billion in assets under management).

21

 

On May 1, 2009, the Evaluation Committee completed its Stage 2 review and approved 46 of 

104 applicants to advance to Stage 3. Treasury did not notify the other 58 applicants that they 

were rejected until December 2009.

Stage 3

In Stage 3, the Evaluation Committee was ―to evaluate the remaining applications and segment 

them into three tiers based on relative attractiveness‖ of the information provided on the 

application in response to the criteria listed below:

1. Qualifications and performance history — organizational background, relevant 

expertise of its personnel, assets under management, expectations for fundraising 

from private investors, past performance investing eligible assets, references for the 

three largest limited partners that invested in their funds, custodians for their assets, 

and their status as a small business, or a business owned by minorities, women or 

veterans.

2. Fund structure and terms — proposed fund structure, summary of terms of the fund, 

the extent that they were interested in receiving debt financing from Treasury, 

proposed fees for managing the fund, and tax consequences for private investors.

3. Investment strategy — asset management strategies22 and their risk management 

strategies.23

4. Governance and management —

o Safeguards to ensure that its PPIF would not acquire eligible assets from its 

affiliates.

o Conflicts of interest mitigation philosophies.

o Methods to minimize waste, fraud, and abuse.

o How they would ensure that its views on the program are aligned with Treasury’s.

 

21 It should be noted that while Treasury passed this company out of Stage 2, the company was later rejected in 

Stage 3 because it ―did not provide sufficient examples of its experience fundraising.‖ 

22 Asset management strategy is a company’s plan for acquiring, monitoring, and disposing of eligible assets to 

maximize profit.

23 Risk management strategy is a company’s plan for mitigating risks that would negatively affect the value of the 

assets, including risks caused by interest rate changes, prepayment, leverage, liquidity, pricing, and counterparty 

and servicer risks. 
15

o Risk oversight.

o Proving that they and their affiliates have paid their taxes and resolved any 

regulatory and legal actions against them.

o Due diligence processes for assessing potential investors. 

5. Valuation, monitoring and reporting — methodologies for determining fair market 

value of the PPIF’s eligible assets, monitoring acquisitions and dispositions of 

eligible assets, and the format for reporting information to Treasury.

Evaluation Committee members and officials from Ennis Knupp told SIGTARP that the Stage 3 

evaluation criteria required more subjective judgments than in Stage 2 because the information 

evaluated was qualitative rather than quantitative. There were 10 individuals that reviewed parts 

of each application: five from the Evaluation Committee and five from Ennis Knupp. The 

Evaluation Committee and Ennis Knupp reviewed the applicant responses to the five categories 

and assigned one of the following ratings for each criterion: 

Exceeds — Response adequately addresses all criteria in category while exhibiting 

identifiable strengths relative to other applicants.

Acceptable — Response adequately addresses all criteria in category.

Marginal — Response includes some deficiencies/weaknesses.

Unacceptable — Response has many deficiencies/weaknesses/omissions and/or presents 

unacceptable risks to Treasury.

Each of the five criteria was rated by a different team of two reviewers, consisting of one person 

from the Evaluation Committee and one from Ennis Knupp. The teams ranked the companies 

based on the responses. If the two reviewers on a team could not agree on a rating, the 

Evaluation Committee as a whole made the final rating assessment. 

During this review stage, the Evaluation Committee concluded that applicants’ responses to three 

of the assessment categories — (2) fund structure and terms, (4) governance and management, 

and (5) valuation, monitoring and reporting — were similar and did not provide meaningful 

information to differentiate among the 46 applicants.24 The Evaluation Committee, therefore, 

placed greater weight on the two remaining categories — (1) qualifications and performance 

history, and (3) investment strategy — than on the other three categories. The Evaluation 

Committee’s memorandum on this stage stated that these two criteria provided a better measure 

of whether an applicant could meet Treasury’s program goals. 

The Evaluation Committee evaluated each of the 46 applicants in Stage 3 and placed the 

applicants into one of three tiers:

 

24 As part of this audit, SIGTARP independently confirmed Treasury and Ennis Knupp officials’ finding that many 

of the applicant responses to these sections were similar to each other.
16

Tier 1: Applicants judged sufficiently attractive to warrant further consideration. 

Applicants placed in Tier 1 received a rating of ―exceeds‖ in at least one of the two 

more heavily weighted categories. Ten applicants were placed in Tier 1.

Tier 2: Applicants judged to be less compelling in terms of their past performance and 

investment strategy than those in Tier 1, but still deserving further consideration. 

Applicants that received no better than acceptable in the more heavily weighted 

categories were placed in Tier 2. Nine applicants were placed in Tier 2.

Tier 3: Applicants that provided information that was not compelling, had 

unacceptable ratings in any of the five categories of criteria, or were considered 

high risk. Applicants that fell short of acceptable in one of the heavily weighted 

categories were placed in Tier 3. Twenty-seven applicants were placed in Tier 3.

On May 20, 2009, the Evaluation Committee completed its review and approved the 19 

applicants from Tiers 1 and 2 for the Finalist Stage.

Finalist Stage

In the finalist stage, the Evaluation Committee’s assessment was based on evaluating the 

remaining applicants against each other, specifically focusing on their qualifications, 

performance history, and investment strategy. As discussed below, the top 14 applicants were 

invited to make in-person presentations to the Evaluation Committee and to complete 

preliminary legal and compliance due diligence questionnaires. The Evaluation Committee also 

held discussions with the finalist applicants’ limited partner references that were included in the 

original application. At the outset of this stage, five Tier 2 applicants were rejected for the 

following reasons:

Applicant 1: Concerns about the numerous and substantial changes to the applicant’s 

organizational structure over recent years, including the applicant’s conversion to a bank 

holding company, and the concern of staff turnover among the fixed income 

professionals likely to be managing the PPIF.

Applicant 2: The concentration of a high percentage of assets under management from one 

client, which raised concerns about the applicant’s ability to operate independent of 

influence from that client.

Applicant 3: The recent departure of company officers, which raised concerns about its 

organizational stability and continuity.

Applicant 4: Concern about forming a long-term partnership with a company that had been 

in existence for only a few years, and a lack of clarity as to how much of the applicant’s 

assets under management were eligible assets.

Applicant 5: An applicant’s performance loss that was especially poor compared to other 

applicants. 
17

At this point, 14 applicants remained: ten from Tier 1 and four from Tier 2. From May 13 to 

May 19, 2009, the Evaluation Committee invited the remaining 14 applicants to Washington, 

D.C., to present their case for selection. Among other items, the Evaluation Committee asked 

the applicants to:

introduce their investment team, including their planned use of small businesses and 

veteran-, minority-, and women-owned businesses to assist them in managing the fund,

provide updated information on eligible assets,

discuss their investment thesis and process, and

present a model fund portfolio, including proposed leverage and expected fund returns.

After being asked to present, three of the 14 remaining applicants withdrew over concerns about 

potential changes to the program’s compliance rules. Officials from one finalist that withdrew 

told SIGTARP that Treasury had ―no rules of the road‖ and worried that Treasury could change 

the parameters of the program at any time without input from the fund managers. Another 

finalist told SIGTARP that it withdrew because of concerns that it might be required to wall-off 

personnel that were already working for other clients. The third finalist withdrew its application 

after giving its presentation in Washington. This company informed SIGTARP that it withdrew 

because working with Treasury increased its compliance costs, the private sector offered more 

opportunities than PPIP, and investment uncertainty and risk could increase if Treasury’s rules 

changed. 

After the presentations, the Evaluation Committee rejected two other applicants, leaving nine 

finalists. The Evaluation Committee’s Finalist Stage memorandum stated that the two applicants 

were rejected for the following reasons:

Rejected Finalist 1 — The Evaluation Committee’s concerns with this finalist related 

more to its investment strategy than its qualifications and performance history. While the 

finalist held significant eligible assets, a high percentage were held by the applicant’s 

parent company and were not managed for private investors. Additionally, several key 

members of the finalist’s investment team were new to the firm, having joined from firms 

that had experienced significant financial distress from missteps related to investments 

made in eligible assets. Moreover, the Evaluation Committee had concerns about the 

company’s ability to raise private capital.

A principal reservation that the Evaluation Committee held for this finalist was its 

proposed high degree of leverage and the application of this leverage to potentially highly 

volatile securities. The company proposed using the highest degree of leverage of any 

finalist and indicated it would apply this leverage to a portfolio that favored collateral 

from subprime25 and Alt-A

26 borrowers. The Evaluation Committee’s memorandum on 

 

25 Subprime borrowers have some credit impairment, limited or no documentation about income and assets, high 

loan-to-value ratios, or high payment-to-income ratios.
18

this stage stated that the company also failed to provide satisfactory responses to a 

number of important questions, including its ability to verify its process (i.e., provide 

documentation of its analysis for the past year to see the consistency of application); 

identify competitive advantages; or identify an unleveraged yield on its model portfolio. 

The finalist indicated that it had not conducted an analysis of its model portfolio’s 

unleveraged yield. The Evaluation Committee’s memorandum stated that this was 

unsatisfactory and that it raised questions as to whether the company would manage the

fund to protect taxpayers’ interests. 

Rejected Finalist 2 — This applicant proposed a partnership between it and another 

company, and described the partnership as being split 50/50 ―top to bottom.‖ The scope 

of the other company’s role in the venture concerned the Evaluation Committee because 

the company had a relatively low amount in total assets under management compared to 

other finalists and employed fewer than 10 investment professionals. The company noted 

that it would need to hire additional staff if it became a fund manager, raising additional 

concerns about its ability to scale its resources to properly manage the fund. Further, the 

Evaluation Committee considered that its presentation failed to demonstrate the 

company’s expertise in managing RMBS, which was to be its primary role in the joint 

venture. The finalist indicated that it expected to play a meaningful role in the selection 

of RMBS assets for the fund. However, during its in-person interview, the Evaluation 

Committee concluded that the finalist failed to demonstrate expertise or an advantageous 

investment strategy in this area. Moreover, the Evaluation Committee ranked its 

investment strategy lower than those of other finalists.

On July 8, 2009, Treasury announced that it had pre-qualified nine companies to be fund 

managers. The companies had 12 weeks to raise the required $500 million in private funds 

before Treasury would match the private capital investment, provide debt financing, and allow 

the company to begin purchasing distressed assets. The nine companies were:

1. AllianceBernstein, L.P. and its sub-advisors Greenfield Partners, LLC and Rialto Capital 

Management, LLC; 

2. Angelo, Gordon & Co., L.P. and GE Capital Real Estate; 

3. BlackRock, Inc.

4. Invesco Ltd.

5. Marathon Asset Management, L.P.;

6. Oaktree Capital Management, L.P.;

7. The Trust Company of the West Group, Inc.; 

8. Wellington Management Company, LLP ; and

 

26 Alt-A borrowers are characterized by a stronger credit history than subprime borrowers but with less-traditional 

features, such as reduced documentation, low down payment, or non-owner occupier.
19

9. RLJ Western Asset Management L.P..

Treasury Relaxes Requirement to Raise $500 Million in

Private Capital in 12 Weeks

In various announcements and FAQs, Treasury emphasized that each pre-qualified fund manager 

was required to raise a minimum of $500 million in private capital within 12 weeks before it

could participate in a closing of the fund and begin to purchase eligible assets. Moreover, it 

rejected applicants that indicated that they would be unable to raise such funds in addition to 

their failure to meet an additional criterion. In a letter to Marathon on November 25, 2009, 

Treasury’s Assistant Secretary for Financial Stability waived the requirement to raise $500 

million and substituted the requirement to raise a minimum of $400 million in private sector 

funds. Similarly, in a letter to Oaktree on December 18, 2009, the Assistant Secretary waived 

the $500 million requirement and substituted a $450 million requirement for private capital. 

Based on these changes, and with each company having raised these new minimums, Marathon 

was allowed to begin purchasing eligible assets on November 25, 2009 and Oaktree on 

December 18, 2009. Additionally, seven of the nine fund managers were allowed to take more 

than 12 weeks after the July 8, 2009, prequalification announcement to raise the minimum 

amount of private capital, as shown in Table 1.

Table 1: Capital Contributions and Closing Dates of the 9 Fund Managers

Company

Initial Private 

Capital Raised 

for PPIF

Initial Fund 

Closing Date

Days after 12 week 

deadline 

(September 30) 

taken to close fund

Invesco $506,000,000 Sept. 30, 2009 -

TCW 625,000,000 Sept. 30, 2009 -

Wellington 771,633,000 Oct. 1, 2009 1 day

AllianceBernstein 642,475,000 Oct. 2, 2009 2 days

BlackRock 522,696,000 Oct. 2, 2009 2 days

Angelo Gordon GE Capital 516,110,000 Oct. 30, 2009 30 days

RLJ Western Asset 505,199,334 Nov. 5, 2009 36 days

Marathon 400,000,000 Nov. 25, 2009 56 days

Oaktree 455,805,000 Dec. 18, 2009 79 days

Source: Treasury-Fund Manager Limited Partnership Agreements, FinancialStability.gov

Both Marathon and Oaktree told SIGTARP that they had investor contributions fall through just 

prior to closing their funds and that this capital would have helped them meet the initial $500 

million threshold. Marathon said that prior to closing, it had offered another fund manager the 

opportunity to contribute $100 million to the fund and participate as a co-manager of its PPIF, 

which would have enabled it to meet its threshold. However, the Evaluation Committee rejected 

this proposal because Marathon had not identified this firm as a partner in its application, as 

required. An Evaluation Committee official told SIGTARP that the firm was going to contribute 

$100 million in private capital and manage it separately from the $400 million in private capital 

that Marathon raised. The official added that this structure would have created two PPIFs, and 
20

thus, an additional oversight issue for OFS in terms of vetting personnel and fund controls and 

management. Oaktree told SIGTARP that it lost potential investors who had expressed concerns 

about ―headline risk‖ — having their companies perceived negatively because they were 

involved in a TARP program. Treasury officials told SIGTARP that senior Treasury officials 

allowed Marathon and Oaktree to proceed with their initial closings because:

The ability to raise $500 million in private capital was not indicative of the investment 

capabilities of the two companies, as their backgrounds in distressed assets and capital 

raising demonstrated that they had significant capabilities that could help meet the 

program’s objectives.

Having nine companies as opposed to seven companies would create a deeper pool of 

fund managers and investors and add additional liquidity to the markets. The increase in 

fund managers would also spread the risk across more managers.

Senior Treasury officials determined it was also unlikely that all of the private capital 

raised by Oaktree and Marathon would be reallocated to the other funds if the two 

companies were not allowed to participate. This would have reduced the amount of 

capital in the program, which Treasury sought to avoid.

TCW Withdraws as a Fund Manager

During the formation of PPIP, in a June 10, 2009 letter, SIGTARP recommended that Treasury 

adopt strict ―key person‖ provisions in its fund manager agreements, consistent with industry 

practice. Treasury included in its fund manager agreements such a provision, which requires the 

company to list key personnel in its application and allows Treasury to terminate a fund under 

certain circumstances when a ―key person‖ no longer runs the fund or leaves the company. As 

reported in SIGTARP’s January 30, 2010, Quarterly Report to Congress (―the January 2010 

Quarterly Report‖), Jeffrey Gundlach left TCW on December 4, 2009, triggering a ―key person 

event‖ under TCW’s agreement with Treasury. Mr. Gundlach served as TCW’s Chief 

Investment Officer and the lead portfolio manager of its PPIF, which had already begun 

purchasing assets. As a result, Treasury froze TCW’s PPIF and halted all fund transactions.

On January 4, 2010, TCW entered into a winding-up agreement with Treasury under which it 

liquidated all assets purchased through its PPIP fund. As reported in the January 2010 Quarterly 

Report, TCW liquidated $477.8 million in securities held by its PPIF. According to the 

agreement, Treasury permitted TCW’s private investors to re-allocate their commitments to a 

different PPIF of their choice. Treasury officials told SIGTARP that former TCW investors 

reallocated $44.5 million of the funds raised by TCW, with $26.9 million reallocated to Angelo 

Gordon/GE Capital and $17.6 million to Wellington. On January 13, 2010, TCW repaid its

outstanding $200 million loan to Treasury, plus interest of $342,200. It also repaid Treasury’s 

equity investment of $156.3 million, plus a $20.1 million profit and a share of Treasury’s legal 

expenses.
21

Treasury Encourages Fund Managers to Partner 

with Small Businesses and with Firms Owned by 

Minorities, Women, and Veterans

This section discusses the process for selecting minority partners to assist the fund managers and 

the due diligence performed on the firms and key managers.

EESA requires that, in instances where Treasury elected to waive any provision of the Federal 

Acquisition Regulation (―FAR‖) pertaining to minority contracting, the Secretary of the Treasury 

―develop and implement standards and procedures to ensure, to the maximum extent practicable, 

the inclusion and utilization‖ of minority- and women-owned businesses, as defined in the 

Financial Institutions Reform, Recovery, and Enforcement Act of 1989. As we discuss later in 

this report, the PPIP structure did not require the application of the FAR, rendering application of 

this EESA provision inapplicable. Nonetheless, Treasury stated in the fund manager solicitation 

that it encouraged prospective fund managers to involve not only minority-owned and womenowned private asset managers, but also small businesses and veteran-owned businesses, and to 

identify these firms in their applications. Treasury labeled all such businesses ―minority 

partners.‖ It did not require or provide guidance on how applicants should select their minority 

partners or what role they should play in the PPIF. In practice, the selected partners were 

generally not responsible for making the investment decisions on behalf of the PPIF, but had 

other roles, as described below. Evaluation Committee members told SIGTARP that they 

extended the deadline for applications, in part, to allow the formation of these minority 

partnerships. Evaluation Committee members said it also allowed fund managers to form 

partnerships after submitting their applications, which was also clarified in the FAQs.

Further, Evaluation Committee members told SIGTARP that among the factors considered in 

Stage 3 and the Finalist Stage of the review of fund manager applications was how applicants 

presented their plan to use minority partners in the fund. They added that applicants were not 

disqualified for excluding this information or for not forming minority partnerships but 

applicants were encouraged to form them. For example, when it interviewed fund manager 

finalists in Washington, the Evaluation Committee asked them to discuss progress made to 

formalize partnership roles and responsibilities with other firms, including small businesses and 

veteran-, minority-, and women-owned businesses. Table 2 lists each of the fund managers, their 

primary minority partners and the role the minority firms play in the funds.
22

Table 2: Minority Partnerships and Services Provided

Source: U.S. Department of the Treasury

Officials from Invesco, for example, told SIGTARP that it selected three minority partners 

(Muriel Siebert& Co, Jackson Securities, LLC, and The Williams Capital Group) to satisfy 

Treasury’s program objective. Other fund managers told SIGTARP that they thought that listing 

a minority-owned firm in their proposal would increase the possibility that their firm would be 

selected. Officials from two minority firms told SIGTARP that they sought to participate in 

PPIP because it might provide opportunities for them to work with the U.S. Government in the 

future. One fund manager, TCW, did not involve a minority-owned business in its PPIF. A 

TCW official said that TCW was able to directly access the market to raise capital, making an 

intermediary unnecessary. Officials from AllianceBernstein told SIGTARP that without 

Treasury’s ―suggestion that the fund manager take on minority partners, it was unlikely‖ that it 

would have partnered with a minority firm or any company.

Fund Manager Primary Partner(s) Service Provided by Partner City

AllianceBernstein Altura Capital Group Capital raising, investment 

sourcing

New York, 

NY

Angelo Gordon / 

GE Capital

CastleOak Securities Broker dealer, capital raising, 

advisory, and asset sourcing

New York, 

NY

Park Madison Partners Capital raising and advisory New York, 

NY

BlackRock Utendahl Capital 

Management 

Asset management (manages 

5% of portfolio)

New York, 

NY

Invesco Jackson Securities, LLC Capital raising Atlanta, GA

Muriel Siebert & Co Capital raising New York, 

NY

The Williams Capital Group Capital raising New York, 

NY

Marathon Blaylock Robert Van Capital raising New York, 

NY

Oaktree Arctic Slope Regional 

Corporation 

None to date Barrow, 

AK

Wellington Advent Capital 

Management

Capital raising and asset 

management 

New York, 

NY

The Williams Capital Group Cash management Durham, 

NC

RLJ Western Asset The RLJ Companies (51% 

minority-owned fund 

management joint venture)

Capital raising and advisory 

services. General partner.

Bethesda, 

MD

TCW None
23

Some fund managers told SIGTARP that they conducted a full minority partner selection 

process, soliciting applications for the position, conducting onsite inspections and due diligence, 

and holding in-person interviews with key individuals. Some fund managers selected minority 

partners with whom they had previous business relationships. For example, Utendahl, a 

minority-owned business, told SIGTARP that it had previously used some of BlackRock’s 

analytics as a client, and Park Madison, a women-owned business, was a long-time investor in 

Angelo Gordon’s financial products.

Some fund managers and minority firms told SIGTARP they had long-standing ―personal 

relationships‖ with each other that served as catalysts to partnership, although the paired firms 

had not previously worked together. For example, the managing principal and managing director 

from Oaktree had previously worked at a law firm with the CEO of Arctic Slope Regional 

Corporation (―Arctic Slope‖), a minority-owned business, and saw the opportunity to partner 

with Arctic Slope on PPIP. An Oaktree official told SIGTARP that Oaktree ―understood and 

embraced the mission‖ to select a minority partner for PPIP. Arctic Slope is the only minority 

partner without financial services experience, and which, at the time of our audit, had provided 

no service to the PPIF.

Of the minority partners, most of their roles were limited to raising capital for the funds. Other 

services performed by the minority partners include the following:

Utendahl specializes in providing fixed income investment management to the 

institutional and wealth management community. BlackRock officials told SIGTARP

that it selected Utendahl as its minority partner because it believed that having a 

minority-owned firm included in its application would increase the chances that their 

application would be approved. Utendahl officials noted that it is unique among minority 

partners in the PPIP program as it manages 5% of the assets in BlackRock’s PPIP fund. 

BlackRock officials told SIGTARP that, in its view, a minority partner should be 

meaningfully involved in the PPIP and it therefore agreed to this relationship. Utendahl 

clears each trade through Bank of New York Mellon, the PPIP custodian/administrator, 

then marks each trade in BlackRock’s trading platform, and ultimately reports it 

separately to Treasury.

CastleOak is a minority-owned and run investment banking boutique with offices in New 

York, Atlanta, and Chicago. The firm serves as a minority partner for Angelo, 

Gordon/GE Capital. Prior to serving in this capacity, CastleOak had a strong business 

relationship with GE Capital, having underwritten a number of GE Capital’s bond 

offerings. CastleOak identifies/sources assets for the PPIF to purchase and holds daily 

conversations with the fund managers about the status of the markets. Additionally, 

CastleOak raised $100 million out of the $1.243 billion raised by Angelo, Gordon/ GE 

Capital’s PPIF.

RLJ is the 51% owner of a joint fund-management venture with Western Asset 

Management Company. According to RLJ, it provides strategic investments in a diverse 

portfolio of companies, while focusing specifically on ―undiscovered or underserved 
24

markets.‖ RLJ currently serves in a compliance role for the PPIF, overseeing Western 

Asset to ensure that it meets Treasury’s partnership requirements. Additionally, as the 

general partner in the RLJ-Western limited partnership agreement with Treasury, RLJ is 

responsible for submitting quarterly reports to Treasury. RLJ officials told SIGTARP 

that the company also contributed a portion of the $20 million that Treasury required the 

fund managers to contribute to their PPIFs.

Arctic Slope is a private, for-profit, Alaska Native-owned corporation that is involved in 

engineering, financial management, oil and gas support, petroleum refining and

distribution, civil construction, and communications. An Arctic Slope official told 

SIGTARP that it saw the opportunity to serve as a minority partner to Oaktree as a new 

financial opportunity. Arctic Slope has a contract with Oaktree that establishes the 

financial and non-financial relationships of the companies. Arctic Slope invested 

$10 million in the PPIF. Arctic Slope is similar to the other fund investors except it does 

not pay a management fee to Oaktree. Oaktree told SIGTARP that it also agreed to 

mentor Arctic Slope shareholders and teach them investment management expertise that 

Arctic Slope says may provide longer-term benefits. During SIGTARP’s meeting with 

an Arctic Slope official, she said the mentoring relationship was still being defined. 

Subsequently, Arctic Slope told SIGTARP that it has begun interviewing shareholders to 

be mentored at Oaktree’s headquarters in Los Angeles in connection with the PPIF. 

Aside from this arrangement, Arctic Slope has not provided services to Oaktree or

Treasury as of the completion of our audit, and its involvement has been limited to being 

one of Oaktree’s investors in the fund.
25

Due Diligence on Pre-Qualified Fund Managers

This section discusses the due diligence that Treasury performed on finalists in the fund manager 

selection process.

After selecting the nine fund managers, Treasury engaged in the following due diligence reviews 

of the approved fund managers prior to executing their agreements and allowing them to 

purchase eligible assets:

For those applicants selected as finalists, Treasury hired Simpson Thacher to assist it with 

the conduct of legal due diligence, among other things.

Treasury also hired Ennis Knupp to perform investigative research/background checks to 

identify potential issues with respect to key individuals in the finalist group of fund 

managers as well as selected minority partners.

The Evaluation Committee and other Treasury professionals conducted site visits to each 

pre-qualified fund manager to identify its ability to follow Treasury’s compliance rules as 

well as to evaluate each firms’ organizational structure and operations. 

Legal Due Diligence by Simpson Thacher & Bartlett LLP

On May 24, 2009, subsequent to the selection of the PPIP fund manager finalists, Treasury 

contracted with Simpson Thacher to perform legal due diligence on the nine fund manager 

finalists. Treasury, with assistance from Simpson Thacher, developed an initial legal due 

diligence questionnaire consisting of 20 questions that focused on potential conflicts of interest, 

legal actions, and Securities and Exchange Commission (―SEC‖) violations by the applicant 

firm, its employees, and affiliates, and sent the questionnaire to the finalists. Based on Simpson 

Thacher’s and Treasury’s analysis of the initial questionnaire responses, Simpson Thacher 

requested additional information from the companies, as needed. 

The scope of Simpson Thacher’s work was limited to review of the self-reported information 

contained in the applicants’ responses to the initial and follow-up questionnaires, and it relied on 

the accuracy and completeness of these self-disclosures. According to a Simpson Thacher 

official, the company put together a legal team to collectively review the applications and 

identify issues that it believed would be of interest to Treasury.

On September 14, 2009, Simpson Thacher submitted its report to the Evaluation Committee

summarizing the results of its analysis. Simpson Thacher noted that nearly all applicants 

disclosed multiple actions that had been brought against them. These included the following:

An investment firm disclosed that it was facing a lawsuit against it and its directors and 

officers alleging improprieties in connection with sponsored mutual funds prior to 2004.
26

An applicant provided documents relating to regulatory matters, including an inquiry by a 

state securities commission.

Another applicant disclosed that it was named as a co-defendant in federal and state class 

action lawsuits by a beneficiary of a Prepaid Affordable College Tuition Program. The 

lawsuits sought damages for potential losses that may be suffered by the program and 

program participants.

Although Simpson Thacher’s summary report to the Evaluation Committee highlighted certain 

items that the firm believed to be particularly noteworthy, it emphasized that it should not be 

relied upon as a complete listing of all disclosures in the questionnaire responses by the 

applicants that the firm deemed might be of interest to Treasury. However, Simpson Thacher 

provided the Evaluation Committee with copies of all of the questionnaire responses. The 

Evaluation Committee told SIGTARP it reviewed the Simpson Thacher report and all of the 

questionnaire responses, performed follow-up visits to each of the pre-qualified fund managers, 

and checked with key clients of the fund managers. Based on the review of Simpson Thacher’s 

work, the Evaluation Committee said it was satisfied that none of the pre-qualified companies 

should be disqualified.

Open-Source Investigations by Ennis Knupp & Associates, Inc.

On July 13, 2009, Treasury contracted with Ennis Knupp to perform background checks on 

identified PPIP fund managers, and selected minority partners. The task order required Ennis 

Knupp to:

Identify risks and relevant facts to help protect the Treasury’s ―interests and reputation,‖ 

and

Research available data bases, paper records, and other sources relevant to the firm’s or 

individual’s history, including but not limited to employment histories, personal 

credentials, court records, corporate records, regulatory filings and records, news media 

searches, and reference checks and interviews.

Ennis Knupp, in turn, subcontracted with two firms to conduct the investigations: First 

Advantage Investigative Services (―First Advantage‖) and Bishops Services, Inc. (―Bishops‖). 

First Advantage completed 71 background investigations of key employees of the prospective 

fund managers. Bishops Services completed 14 background investigations of minority partners. 

According to the Evaluation Committee, the list of key employees was principally obtained from 

information provided in the fund managers’ original applications. First Advantage and Bishops 

prepared separate reports on the results of each of their background investigations which it 

submitted to Ennis Knupp.

According to officials from the two subcontractors, their reports were factual representations of 

their investigative results, and did not contain evaluations of the information. They added that 

the scope of their investigations was comparable to other investigations they perform and there 
27

were no scope limitations imposed on them by Ennis Knupp. Upon receipt of final background 

reports from First Advantage and Bishops, Ennis Knupp reviewed the reports for issues of 

concern, reportedly using the following questions in evaluating the reports.

Would knowing this piece of information have any bearing on an investor’s willingness 

to invest with this entity?

Does this issue have any potential to embarrass or otherwise reflect poorly upon investors 

that choose to do business with this entity?

According to Ennis Knupp, its review team held conference calls periodically during the process 

with the Evaluation Committee to discuss issues that surfaced in the First Advantage and 

Bishops reports. If both Ennis Knupp and the Evaluation Committee agreed that an issue was 

immaterial and/or a routine course of business event, it was not considered further. If either the 

Evaluation Committee or Ennis Knupp determined that an issue had the potential to be of 

concern, the issue was documented and added to the formal background investigation summary 

memoranda that Ennis Knupp submitted to the Evaluation Committee. According to the 

Evaluation Committee, it followed up on these issues with the fund managers and the minority 

partners involved. 

Treasury officials told SIGTARP that they did not receive the written reports of First Advantage 

or Bishops or relevant backup documentation for each due diligence check. Rather, on 

September 23, 2009, Ennis Knupp provided Treasury list of items it considered material in 

nature and that may require additional review by Treasury. According to Treasury, members of 

the Evaluation Committee and officials from the Treasury’s Offices of the General Counsel and 

Risk Management reviewed Ennis Knupp’s findings. None of the pre-qualified fund managers 

or their partners were disqualified as a result of these reviews.

Treasury Site Visits to Fund Managers

Between July 13 and August 25, 2009, Treasury conducted 10 site visits with the nine prequalified fund managers, and the one minority firm, Utendahl, that would be independently 

investing and managing a portion of PPIP assets. According to Treasury, each site visit was led 

by one of its investment specialists along with representatives of Office of Financial Stability’s 

Operations, and Risk Management and Compliance. A member of Ennis Knupp also

participated in the meetings.

On September 22, 2009, Treasury prepared a record of its site visits to the fund managers. The 

record stated that each site visit included a presentation by the fund manager’s investment, 

operations, and compliance personnel, followed by extensive discussions and question and 

answer sessions. Treasury noted that during the site visits, the Treasury team closely scrutinized 

the firm’s organizational and operational structure as well as the ability and willingness of each 

fund manager to abide by Treasury’s ethical standards, rules, and regulations, which had been 

issued on July 8, 2009. Specifically, Treasury’s memorandum stated that key areas of inquiry 

included:
28

Pre-qualified Fund Managers’ compliance with the Ethical Standards and Conflicts of 

Interests Standards and Rules

Creating and updating a Watch List of Eligible Assets and establishing a secure website 

to make it available to Treasury

Know-Your-Customer/Client, and anti-money laundering policies and procedures; and

Controls to prevent the Fund Managers from acquiring Eligible Assets from prohibited 

entities (e.g., other Fund managers, affiliates, sub-advisors).
29

Application of the Federal Acquisition Regulation

The section discusses the application of the Federal Acquisition Regulation in the selection of the 

fund managers.

The Federal Acquisition Regulation (―FAR‖) governs how executive agencies purchase goods 

and services. At its core, the FAR intends to preserve the public’s trust in how the Government 

uses its money and seeks to:

promote competition;

efficiently manage costs, quality, and timeliness of goods or services provided to the 

Government; 

encourage integrity, fairness, and openness in how the Government does business; 

minimize administrative operating costs; and 

fulfill public policy goals, such as transparency and accountability.

All executive agencies are required to comply with the FAR when they purchase goods or 

services with appropriated funds, unless a statutory or regulatory exception applies. Further, the 

FAR applies to the entire acquisition process, beginning at the point when an agency recognizes 

a need to make a purchase. Although EESA includes an exception to the FAR, contracting under 

EESA is not automatically exempt from the FAR. Section 107(a) of EESA provides that the 

Secretary of the Treasury can waive provisions of the FAR upon a determination that urgent and

compelling circumstances make compliance with that provision contrary to the public interest.

Treasury determined that it was not required to comply with the FAR when it selected firms to 

manage PPIP funds. According to Treasury, it designed the fund manager selection processes to 

employ ―best practices‖ that were in the ―spirit of the FAR.‖ In support of their statement that 

the FAR is not applicable, Treasury officials explained that pursuant to EESA there are three 

types of commercial parties with which Treasury may interact: counterparties and co-investors, 

contractors, and financial agents. They further explained that interaction with counterparties is 

controlled by section 101(a) of EESA; interaction with contractors is controlled by section 

101(c)(2) of EESA and the FAR; and interaction with financial agents is controlled by section 

101(c)(3) of EESA. Treasury officials concluded the PPIP fund entities are ―investment 

counterparties receiving equity investments and loans from the $700 billion.‖ Accordingly, they 

are not contractors or financial agents being paid for goods or services, and were not selected 

under the FAR authority or a financial agent process (emphasis appears in the original).

In other words, Treasury officials determined that transactions with PPIP fund managers do not 

constitute an acquisition of goods or services, nor do they involve the delegation of sovereign 

functions. Rather, they characterize each transaction as a commitment to purchase a troubled 

asset under EESA for the PPIF pursuant to a TARP program and a troubled asset determination 
30

made by the Secretary of the Treasury pursuant to his authority under Section 101(a)(1) of 

EESA, not a procurement of services governed by the FAR.

For purposes of EESA, the phrase ―troubled asset‖ includes any ―residential or commercial 

mortgages and any securities, obligations, or other [equity or debt] instruments that are based on 

or related to such mortgages, that in each case was originated or issued on or before March 14, 

2008, the purchase of which the Secretary determines promotes financial market stability.‖ 

Treasury’s limited partnership interests in the PPIFs serve as financial instruments, which 

Treasury has deemed necessary to promote financial market stability. Thus, according to 

Treasury, the FAR does not apply to Treasury’s selection of the asset managers with whom 

Treasury co-invests through the PPIFs, because the interests in the PPIF itself — the limited 

partnership — is a ―troubled asset‖ of which Treasury is authorized to purchase an equity interest 

under EESA. According to Treasury, any services that the PPIF fund managers provide are 

incidental to, but part of, the limited partnership agreement. SIGTARP agrees that the limited 

partnership structure that Treasury uses to implement the PPIP does not require the application of 

FAR. 
31

Current PPIP Fund Status

This section provides the current status of the PPIP funds, the amount of private capital invested 

in the funds and the federal contribution in terms of equity and debt investments.

The size of the PPIP program has dramatically decreased in size from when the program was 

initially announced as a way to facilitate the purchase of up to $1 trillion in distressed assets. 

The eight remaining fund managers completed their private capital raises27 of a total of $7.4 

billion of private-sector equity capital, which Treasury matched for total equity capital of $14.7 

billion. Treasury also provided $14.7 billion of debt capital, resulting in total purchasing power 

of $29.4 billion ($22.1 billion of which are TARP funds). As publicly reported by Treasury, as 

of September 30, 2010, the PPIFs have drawn‐down approximately $18.6 billion of total capital 

(63 percent of total purchasing power), which has been invested in eligible assets and cash 

equivalents pending investment.

The assets were purchased through an intermediary broker or dealer, from banks, insurance 

companies, mutual funds, pension funds, and other eligible sellers, as defined in ESSA. For 

further information on the assets the PPIP managers are purchasing and the performance of 

individual funds, see SIGTARP’s Quarterly Report to Congress, July 21, 2010. 

Table 3: Equity and Debt Invested Under PPIP ($ in billions)

Fund Manager

PrivateSector 

Equity 

Capital 

Treasury 

Equity

Treasury 

Debt 

Total 

Purchasing 

Power

AG GECC PPIF Master Fund, L.P. $1.2 $1.2 $2.5 $5.0

AllianceBernstein Legacy Securities Master Fund, L.P. 1.2 1.2 2.3 4.6

BlackRock PPIF, L.P. 0.7 0.7 1.4 2.8

Invesco Legacy Securities Master Fund, L.P. 0.9 0.9 1.7 3.4

Marathon Legacy Securities Public-Private Investment 

Partnership, L.P. 0.5 0.5 0.9 1.9

Oaktree PPIP Fund, Inc. 1.2 1.2 2.3 4.6

RLJ Western Asset Public/Private Master Fund, L.P. 0.6 0.6 1.2 2.5

Wellington Management Legacy Securities PPIF 

Master Fund, LP 1.1 1.1 2.3 4.6

Totals as of 6/30/10 $7.4 $7.4 $14.7 $29.4

Note: 1.Numbers affected by rounding

Source: Treasury ―Legacy Securities Program Update- Month Ending 6/30/2010,‖ received 7/15/10

 

27 Oaktree and Marathon, the two successful fund manager applicants that had not raised $500 million in private 

capital before their initial closings, have since raised $1.61 billion and $475 million, respectively. 
32

Conclusions

Four months after injecting $25 billion of capital into the country’s largest banks under TARP, 

Treasury announced PPIP, a program that would marry private capital with TARP funding to 

create individual investment funds run by private managers that would purchase certain 

mortgage-backed securities. According to Treasury, the program was intended to ―restart the 

market for legacy securities, allowing banks and other financial institutions to free up capital and 

stimulate the extension of new credit.‖ Before beginning the process to select the managers to

run the individual PPIFs, Treasury officials consulted three large investment firms—BlackRock, 

PIMCO and TCW—to gather information on how to best design PPIP. After incorporating 

feedback from these companies in the program design, Treasury published selection criteria that 

favored larger asset managers, such as the ones Treasury consulted in designing the program, 

although the program was open to all companies. In fact, all three firms that Treasury consulted 

in the program design made it to the Finalist Stage of the PPIP fund manager selection process, 

with two of them, BlackRock and TCW, being selected and the third, PIMCO, withdrawing its 

application.

SIGTARP found that Treasury constructed a reasonable architecture to accomplish its objective 

of identifying larger firms to manage PPIFs. It established an Evaluation Committee to review 

the 141 applications, and this committee included members not just from Treasury but from the 

Export-Import Bank and the Overseas Private Investment Corporation. It hired a law firm to 

assist in designing the application and establishing the selection criteria, and an independent 

advisor with expertise in evaluating complex investments to assist in reviewing applications. It 

conducted a multi-stage evaluation process, with each stage reducing the number of applicants 

moving to the next stage, and also performed on-site due diligence reviews as part of the process. 

SIGTARP also found that Treasury adequately documented the selection process, contributing to 

our ability to conduct this review. SIGTARP agrees with Treasury’s explanation that the legal 

structure of the PPIP did not require it to use the Federal Acquisition Regulation process. 

On March 23, 2009, Treasury published an application to be used by fund managers seeking to 

participate in the program. Treasury’s PPIP application listed five criteria that it ―anticipated‖ 

would be used to prequalify fund managers: 

1. Demonstrated capacity to raise at least $500 million of private capital.

2. Demonstrated experience and a performance track record investing in eligible assets.

3. A minimum of $10 billion (market value) of eligible assets28 under management.

 

28 For the purposes of PPIP, eligible assets are residential and commercial mortgage-backed securities secured 

directly by actual mortgages, leases, or other assets, and not other securities that were issued before January 1, 

2009, and originally rated AAA (or an equivalent rating) by two or more nationally recognized statistical rating 

organizations.
33

4. Demonstrated operational capacity to manage the funds in a manner consistent with 

Treasury’s stated Investment Objectives while also protecting taxpayers.

5. Headquartered in the United States.

While the selection process ultimately succeeded in creating nine privately managed funds with 

the means to purchase almost $30 billion in distressed assets, several aspects of the process are 

noteworthy: 

Treasury’s published selection criteria created confusion and uncertainty among 

applicants. While Treasury published five criteria, it did not state how many of these 

criteria applicants were required to meet, or make clear how applicants could demonstrate 

that they met the criteria. The application introduced further uncertainty with the caveat 

that Treasury only ―anticipated‖ using the five criteria, suggesting that the criteria might 

change after the applications were submitted. After receiving only four applications, and 

dozens of requests for clarification from potential applicants, Treasury responded that it 

would use a ―holistic‖ approach in which ―failure to meet any one criteria [would] not 

necessarily disqualify a proposal.‖ Internally, Treasury interpreted this modification to 

mean that all applicants had to meet four of the five stated criteria in order to be 

considered, though it did not reveal that interpretation to applicants. 

Treasury refined its criteria during the selection process in a way that impaired the 

transparency of the process. In order for an applicant to be deemed to meet the fourth 

criterion listed above (related to operational capacity to manage funds consistent with 

Treasury’s investment objective), Treasury imposed an absolute requirement that each 

applicant demonstrate that it had a minimum of $1 billion in total assets under 

management. Treasury did not, however, disclose this change to applicants. This single, 

undisclosed requirement had the effect of reducing the applicant pool by more than 40%. 

While perhaps technically compliant with its public statement that no one criterion would 

result in disqualification, this new undisclosed threshold had the additional consequence 

that any applicants that failed to meet it would also automatically fail to meet the $10 

billion threshold for eligible assets (Criterion 3), so that one strike instantly became two, 

and with two strikes they were out. 

Treasury’s published selection criteria risked unnecessarily discouraging applications 

from smaller asset managers. Smaller companies that might have had significant 

expertise and experience still could not realistically meet the application requirement that 

they have at least $10 billion of eligible assets under management, a threshold that 

Treasury’s contractor Ennis Knupp commented was an ―onerous hurdle to clear‖ and that 

only a limited number of applicants could meet. While this criterion undoubtedly 

dissuaded certain applicants from applying, it ultimately was not heavily weighted by 

Treasury, with two-thirds of the selected managers failing to meet the threshold. Indeed, 

the eventual size of PPIP suggests that the $10 billion criterion was unnecessary. The 

total purchasing power of the entire PPIP is $30 billion spread across eight managers.
34

Treasury also gave an advantage to larger applicants with respect to the requirement that 

applicants demonstrate a capacity to raise $500 million in capital. Treasury’s practice

was, generally, to deem applicants that affirmatively stated that they could raise at least 

$500 million to have passed this criterion, while failing those that affirmatively stated 

that they could not. But Treasury passed one applicant on this criterion, even though the 

applicant failed to address either its capacity or its intention to raise that sum, based 

chiefly on the applicant’s size. For those 12 other applications that also did not 

affirmatively state whether or not they were able to raise $500 million in capital for the 

PPIF, size again appeared to matter. Treasury deemed the nine applications that 

referenced at least $7.5 billion in assets under management to meet this criterion, while 

concluding that all three applicants that had between $1 billion and $3 billion in assets 

under management did not. As a result, in effect, Treasury’s ―holistic‖ approach favored 

larger companies that otherwise failed to meet its standard. Furthermore, after the 

application process was completed, Treasury waived the $500 million threshold for the 

two PPIF managers (Oaktree and Marathon) that could not meet it, putting into question 

the significance of a criterion that more than half of the applicants were deemed not to 

have met, and also likely deterred otherwise qualified applicants from seeking to 

participate in the program.

In sum, while Treasury designed and adequately documented a reasonable selection process, the 

implementation of that process is vulnerable to criticism. First, the initial selection criteria 

created confusion among applicants, the subsequent clarification failed to remedy that confusion 

and was arguably misleading, and an undisclosed modification impaired transparency. Second, 

the emphasis on the size of potential fund managers, while perhaps understandable, not only 

threatened to discourage qualified applicants from applying but also, given the selections 

ultimately made, may have been unnecessary. As a result, the taxpayer may have lost the benefit 

of the participation of qualified, albeit smaller, fund managers because they were avoidably 

deterred from applying or unnecessarily rejected. 

Finally, Treasury encouraged the applicants to form partnerships with small, veteran-, minority-, 

and woman-owned private asset managers, but provided no guidance to applicants on either the 

nature or the extent of the expected role of a minority partner. Treasury’s encouragement 

resulted in the inclusion of one or more minority-owned businesses in eight of the nine selected 

fund managers. But without guidance from Treasury, applicants were left to their own 

interpretation, which resulted in the minority-owned businesses largely participating to raise 

capital, with only two actually involved in managing assets and one firm, Arctic Slope, that 

appears to provide no assistance whatsoever. While not required by law to do so, had Treasury 

taken greater steps to clarify the expected role of the minority-owned businesses, these partners 

might well have a more meaningful role in the administration of the funds, and avoid the 

appearance, in at least one case, of being mere window dressing for the application and the 

program. 
35

Management Comments and Audit Response

Treasury responded preliminarily to a draft of this report by letter dated October 4, 2010, which 

is reproduced in Appendix C. In its response, Treasury describes the audit’s summary of the 

fund manager selection process as informative and likely to be helpful in explaining that process 

to the public. Treasury also states that it strongly disagrees with many of SIGTARP’s statements 

and conclusions regarding certain details of the fund manager selection process that SIGTARP

believes were not sufficient. Treasury added that it will continue to review the report and may 

respond more fully at a later date.

SIGTARP looks forward to Treasury’s more complete response to the report. It is important to

Note that Treasury was provided an opportunity to review a discussion draft of the report and

Provide comments. Treasury did so, changes were made to the report as appropriate, and, at the

End of that process, Treasury offered no material factual objections to the draft audit report.

Treasury might not agree with how the audit’s conclusions portray the Treasury’s decisionmaking process on the selection of fund managers for the Legacy Securities PPIP, but Treasury 

has not challenged the essential underlying facts upon which those conclusions are based.
36

Appendix A — Scope and Methodology

Senator Claire McCaskill, Chairman of the Homeland Security and Governmental Affairs 

Committee’s Subcommittee on Contracting Oversight, and Senator Robert Bennett, Ranking 

Member of the Subcommittee, raised concerns about Treasury’s selection of fund managers and 

their partners. In a joint letter, Chairman McCaskill and Senator Bennett asked SIGTARP to 

review a number of issues related to the PPIP. Our reporting objectives were to determine:

what criteria Treasury used to select the fund managers and their minority partners;

whether Treasury consistently applied its criteria in the selection of the fund managers; 

the extent that Treasury performed due diligence reviews on the fund managers and their 

minority partners. SIGTARP has begun work to determine whether Treasury has 

established controls to prevent or mitigate conflicts of interest in a separate audit; and

whether financial agreements between Treasury and the successful fund manager 

applicants were governed by the Federal Acquisition Regulation

To determine the criteria for this audit, we interviewed the Treasury officials involved in the 

selection process to gain Treasury’s rationale for how it selected applicants throughout the 

process. We examined memoranda on the discussions and approval of final selection criteria 

along with the fund manager application guidelines that were posted on Treasury’s website. 

In reviewing Treasury’s selection process, we conducted two independent reviews of each of the 

141 fund manager applications alongside the selection criteria described in the Evaluation 

Committee memoranda. We then compared our findings with the Evaluation Committee’s 

assessments to determine the extent that criteria were consistently applied. During our review of 

each stage, we sought clarification from Treasury officials on individual applicants and the 

process in general. 

To determine how Treasury selected fund managers, we reviewed Treasury’s finalist selection 

process, including presentation outlines and notes taken by officials during the presentations to 

assess the extent that Treasury consistently applied qualitative judgments on selection criteria. 

Following our analysis of the pre-qualification process, we contacted each of the fund managers 

and their minority partners. 

To determine the due diligence processes performed by Treasury, we reviewed the PPIP internal 

controls memoranda. We contacted Simpson Thacher and Ennis Knupp, the firms responsible 

for conducting the compliance and legal diligence reviews to determine the extent that Treasury 

provided oversight on the processes. 

To determine whether the FAR governed financial agreements negotiated between Treasury and 

the fund managers, we reviewed the agreements between Treasury and the fund managers. We 
37

also interviewed Treasury officials to determine the extent to which, if any, the FAR was applied 

to the process, and if not, the reasons it did not apply. 

We conducted this performance audit in accordance with generally accepted government 

auditing standards from November 2009 to September 2010. Those standards require that we 

plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and conclusions based on our 

audit objectives.

Internal Controls

We did not review the internal controls established by the PPIP fund managers to manage their 

respective funds. This issue will be addressed in a complementary SIGTARP audit of fund 

manager internal controls and compliance programs.

Use of Computer-Generated Data

The information used in the conduct of this audit was, for the most part, not computer-generated, 

although some of the information used by fund managers to prepare reports, such as their 

applications, would likely have come from audited financial statements. Any computergenerated data was either a minor part of this audit or was generated from audited financial 

statements and, therefore, considerate sufficiently reliable for our use.
38

Appendix B — Selection Process Timeline

Initial Fund Closings (Sept. 30-Dec. 18): TCW and Invesco are the first to close on their funds. 

Marathon closes with $400 million in private capital and Oaktree is the last fund manager to do so, 

after raising $456 million.

March

April

May

June

July

August

September

October

November

(March 23): Treasury publishes the PPIP Fund Manager Application on website.

Stage 1 (April 24-May 1): Treasury receives 141 applications and removes 37 that were ―nonresponsive‖ or duplicates.

(April 6): Treasury publishes Frequently Asked Questions which state that applications will be 

evaluated on ―holistic‖ basis. Failure to meet only one criterion will not disqualify application.

Finalist Stage (May 13-June 16): Treasury invites 14 applicants to present in Washington, D.C.; 2 

applicants withdraw prior to the presentations. Following the presentations, 1 applicant withdraws 

and Treasury removes 2 others. As a result, Treasury selects nine fund managers for prequalification.

Stage 2 (May 1): Treasury internally publishes guidelines for 5 selection criteria for this stage but 

does not notify applicants of the guidelines. Treasury completes its evaluation of 104 applicants 

and removes 58 for failure to meet at least 4 of 5 selection criteria.

Finalist Stage (May 1- May 13): Treasury removes 5 of the 19 applicants principally based on 

their experience managing eligible assets and quality of their organizations compared to the other 

applicants. 

Stage 3 (May 1- May 13): Treasury internally decided to focus on Qualifications and Investment 

Strategy. Treasury did not notify applicants of these changes. Treasury evaluates 46 applicants 

based on their responses to 5 categories of criteria and selected 19 for the finalist review stage. 

Treasury internally publishes a memorandum on this stage on May 20, 2009.

July 8: Treasury announces the pre-qualification of 9 fund managers.

Due Diligence reviews (May 24-Sept. 23) Treasury and Ennis Knupp conduct on-site, background, 

compliance, operational and business due diligence. Treasury and Simpson Thacher conduct legal 

due diligence reviews.

December
39

Appendix C—Management Comments
40

Appendix D—Audit Team Members

This report was prepared and the review was conducted under the direction of Charles 

Thompson, Supervisory Management Auditor, Office of the Special Inspector General for the 

Troubled Asset Relief Program.

The staff members who conducted the audit and contributed to the report include: 

Jonathan Evans

Joshua Moses

Amy Poster
41

Appendix E — Acronyms

CDO collateralized debt obligation

CMBS commercial mortgage-backed securities

EESA Emergency Economic Stabilization Act of 2008

FAR Federal Acquisition Regulation

FAQ Frequently Asked Questions

FDIC Federal Deposit Insurance Corporation 

PPIF Public-Private Investment Fund

PPIP Public-Private Investment Program

RMBS residential mortgage-backed securities

SEC Securities and Exchange Commission

SIGTARP Special Inspector General for the Troubled Asset Relief Program

TARP Troubled Asset Relief Program

TCW The Trust Company of the West Group, Inc.

Acronym Definition
42

SIGTARP Hotline

If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the 

Troubled Asset Relief Program, please contact the SIGTARP Hotline.

By Online Form: www.SIGTARP.gov By Phone: Call toll free: (877) SIG-2009

By Fax: (202) 622-4559

By Mail: Hotline: Office of the Special Inspector General

for the Troubled Asset Relief Program

1801 L Street, NW

Washington, D.C. 20220

Press Inquiries

If you have any inquiries, please contact our Press Office:

Kristine Belisle 

Director of Communications

Kris.Belisle@do.treas.gov

202-927-8940

Legislative Affairs

For Hill inquiries, please contact our Legislative Affairs Office:

Lori Hayman

Director, Legislative Affairs

Lori.Hayman@do.treas.gov

202-927-8941

Obtaining Copies of Testimony and Reports

To obtain copies of testimony and reports, please log on to our website at www.sigtarp.gov.