The Treasury Department has released the details of its public-private investment plan to remove bad assets from banks' balance sheets. The program, which could use up to $100 billion in TARP money alongside private capital, was first introduced by Treasury Secretary Tim Geithner in February, when he outlined the broad Financial Stability Plan.
The administration hopes that advantageous financing provided by the Federal Deposit Insurance Corp. (FDIC) and Federal Reserve will spark up to $1 trillion of legacy asset purchases, including acquisitions of mortgages and mortgage-backed securities. Sales of legacy loans will free up obstacles to lending, while sales of legacy securities will unclog the secondary markets, according to the Treasury.
"This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly," the Treasury's guidelines read. Sharing the risks with the private sector will provide a safety net for taxpayers and realize fair asset prices, the administration hopes.
The legacy loan program will feature equity co-investment by the Treasury and debt guarantees by the FDIC. The Treasury anticipates that approximately half of the TARP resources for legacy assets will be devoted to the legacy loans program, but adds that there will be flexibility to allocate resources to the areas needing the greatest investment.
Individual investors, pension plans, insurance companies and other private investors will help determine asset prices. The legacy loans program will facilitate the creation of individual Public-Private Investment Funds, which will be overseen by the FDIC and will purchase asset pools on a "discrete basis."
The legacy securities program consists of two related parts designed to draw private capital into secondary markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.
Through the expanded TALF program, nonrecourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage-backed securities that were originally rated AAA and outstanding commercial mortgage-backed securities and asset-backed securities that are rated AAA. Lending rates, minimum loan sizes and loan durations have not been determined.
The Treasury will approve up to five asset managers to purchase legacy assets, and managers will have a period of time to raise private capital to target the designated asset classes. They will receive matching Treasury funds under the investment program.
Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital, subject to further restrictions.