Posted by Joseph Y. Calhoun, III

The Treasury Department’s public/private partnership for purchasing the toxic assets of the banking system is an exclusive club (via WSJ):

The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as “fund managers” to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we’d have thought Treasury would encourage as many players as possible.

But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks.

Obviously, that narrows the list of potential managers considerably. So, who qualifies?

While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets offtheir books — not lining up to buy more. As for asset management firms that hold such a big portfolio — and are also healthy enough to serve as fund managers — there is only a small pool, such as Black Rock, Pimco, Goldman Sachs or Legg Mason, as well as a titan or two of the hedge fund industry, such as Bridgewater.

The only good reason I can think of for placing such a limitation on the manager selection process is to speed the process, but we’ve been waiting for 6 months to get something like this off the ground. Would another month or so to consider the applications of smaller, but well qualified managers really make that much difference? Couldn’t the program get off the ground with the large managers while they review the smaller managers’ applications? And shouldn’t Treasury want a larger number of managers to create the best price discovery? Maybe that’s the problem; Treasury doesn’t really want price discovery…

Big government and big business are getting entirely too comfortable with each other if you ask me. The big and well connected get special privileges and bailouts while smaller companies are left to fend for themselves. Don’t get me wrong; I’m not arguing for bailouts/handouts for smaller companies, just a level playing field. I’m in the camp that believes that too big to fail is just a different way of saying too well connected to fail, but if the government is to be this involved in markets, they should not favor companies just because of size. Size does not necessarily correlate with competence.