US STOCKS OUTLOOK:Bull Market Hinges On Public/Private Trust

By Rob Curran and Geoffrey Rogow

MARCH 23, 2009, 3:07 P.M. ET

NEW YORK (Dow Jones)--Traders and investors like the Treasury Department's toxic-asset investment plan in theory, but the outlook for banks and the stock market is clouded by a wariness of how a "public-private partnership" will work in practice.

Ultimately, the success of the whole bank-stabilization program - and whether stocks have entered a new bull market - depends on whether lucrative investment opportunities trump a lack of trust in the government on Wall Street. The initial stock-market reaction was positive, with the Standard & Poor's 500 up 5.2% recently, led by a 12% bounce for the financial sector. The broad index is roughly 20% above its low on March 6.

The Treasury plan strikes at the heart of the problems for the financial system: fears about bank solvency because of balance sheets laden down by assets that nobody wants to buy. In a structure described as "innovative" by Morgan Stanley (MS), private investors will have cheap access to government funds to invest in these assets, thus creating a market in the vacuum. By offering nonrecourse loans to buy distressed mortgage bonds and other investments with the potential for high yields, the government is trying to minimize risk and maximize incentives for participation.

"The (stock) market was looking for anything that was more definitive from the Treasury than what we had," said Bud Haslett, chief executive of Miller Tabak Capital Management. "There are still a lot of unknowns, but it is more clear. The market is going to have a positive bias going forward."

Some investors are already expressing interest, and bond manager Pacific Investment Management Co. said it will participate in the plan, as did money manager BlackRock Inc. (BLK).

"You need to really lure private investors in and make it a situation where you're making money, or no one will play," said Mark Sunshine, president of West Palm Beach, Fla., commercial lender First Capital. Sunshine estimates investors would not want to touch toxic assets unless likely returns were 30% pretax.

Shares of BlackRock rose 11% to $126.19, while those of investment fund manager Blackstone Group LP (BX) surged 24% to $7.79, its highest level since November. Shares of the banks choking on the "toxic assets" also rallied on hopes they would finally be able to sell them: Citigroup Inc. (C) added 16% to $3.05; Bank of America (BAC) rose 17% to $7.25.

In one twist, the retroactive tax on bonuses at American International Group Inc. (AIG) may discourage some investors, because of an aversion to a "public/private partnership" with a partner that can change the rules at any time. Bankers and investors on Wall Street argue that the risk of the government moving the goal posts and retroactively taxing profits is a major deterrent to participation.

"I talked to two guys who said their firms would normally be involved who said, 'You know what? Maybe I'm not as interested in being involved now; I don't want them coming back and saying, 'You bought this from us, now we have the right to look at it,'" said Joe Kinahan, chief derivatives strategist at thinkorswim Group (SWIM).

Other critics warn that high hopes for other stabilization plans soon faded, and that the devil could again be in the details. Among the possible hitches for the latest plan is the lack of "downside" protection, according to Charles Calomiris, a professor at Columbia University's business school. Burned by previous rounds of distressed-asset-buying in mortgage securities, investors may not wish to take another flyer - even with cheap government loans.

One of the only ways to "change the equilibrium in pricing" is to "absorb downside risk," said Calomiris.

There's general agreement that creating a market for toxic assets would go a long way to stabilizing the banking sector, and recovery of the economy and stock market hinge on such stabilization.

Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund, said the sustained government efforts to pump money into the system has resulted in a lasting change of direction for stocks. For much of 2008, Di Mattia was betting against the market, but he's observed a change in the prevailing winds recently.