The eight investment funds created under “PPIP” (Treasury Secretary Geithner’s Public-Private Investment Program) have proven a smashing success. Through September 30th the average net internal rate of return (“ROR”) is 36%.

The program aimed to help ailing U.S. banks by purchasing so-called toxic mortgage-backed securities (“MBS”) weighing down their balance sheets. Treasury partnered with private investment fund managers by providing $14.7 billion of debt financing. In addition they took a 50/50 equity stake in each fund by matching dollar for dollar the $7.4 billion raised from private investors. Managers were selected in July 2009 and the funds began investing as early as September 2009.

Results vary but are positive. On the high end of the range is GE’s fund checking in at a whopping 52% ROR. AllianceBernstein is up 41%. Western Asset Management is up 37%. Wilbur Ross’ fund is up 34%. On the low end is a fund managed by Oaktree Capital Management with a 19% ROR. To put into context the S&P 500 is up about 10% during the same time period.

How’d they do it? Skill? Luck? Cosmic forces? More accurately it’s been a relaxation of risk tolerance coupled with insatiable investor demand for yield.

Consider the following from a statement released by AllianceBernstein: “Returns are not a function of better fundamental data. It’s largely a function of compression in yield premiums.” In plain language buyers are willing to pay more to receive the income stream provided by the MBS resulting in higher prices for these securities.

Pricing firmed also because of increased liquidity and marketability. As Wilbur Ross put it PPIP provided stabilization of the MBS market as “the funds gave the trading community a boost in knowing there would be a buyer.”

But what about this 36% average ROR? Is it true? From a cash flow and realized gain perspective Uncle Sam has received $215 million of interest and dividend payments from PPIP. The balance of the return ($1.5 billion) is unrealized gain. Compare this to the wider TARP (“Troubled Asset Relief Program”) that has earned $25.2 billion from interest, dividends and the sale of securities against an investment of $309 billion in banks and insurers.

When adjusting for the debt financing portion of the investment PPIP’s actual ROR is in the 5.6% range according to Linus Wilson – finance professor at the University of Louisiana in Lafayette. TARP’s total return weighs in at 8.2% according to Bloomberg.