Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

At last Treasury has come forward with its Public Private Investment Program for dealing with toxic assets, only now that there is a plan, the proper term is “troubled legacy assets.” Stocks have rallied since Treasury announced the plan this morning, and legislators on Capitol Hill have halted their rush to claw back the AIG bonus money, some say partly in order to study the new plan. The Treasury Secretary is scheduled to testify before the House Financial Services Committee on Thursday. Will the positive momentum continue up to and following his hearing performance? Secretary Geithner has a lot riding on this week.

The plan, which will use $100 billion of TARP funds, has two parts intended to revive the anemic financial system—the Public Private Investment Fund (PPIF) for Legacy Loans and the PPIF for Legacy Securities. Both are aimed at residential and commercial real estate-related assets. Banks tend to hold the assets as loans and entities such as insurers, pension funds, mutual funds and individual retirement accounts tend to hold the assets as securities backed by loans. The Federal Deposit Insurance Corporation with Treasury will work to create PPIFs that will purchase “loans and other asset pools” from participating banks, and the FDIC will determine eligibility criteria. The FDIC will also be using contractors to help it analyze loan pools and determine the level of debt to be issued by the PPIFs (with leverage not exceeding a 6 to 1 debt-to-equity ratio). The FDIC will then auction off each loan pool to the highest bidder. Treasury will provide 50 percent of equity financing and the private sector auction winner will provide the other 50 percent. The private sector winner can obtain financing by issuing new debt, which the FDIC will guarantee, that is collateralized by the purchase.

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Some surprises were included in today's announcement by the Federal Reserve and the Treasury on new developments with the soon-to-be $1 trillion Term Asset-Backed Securities Loan Facility (TALF). Of particular note is the statement that the two agencies will push for legislation to re-tool the program.

According to the joint release, the TALF is “designed to catalyze the securitization markets by providing financing to investors to support the purchase of certain AAA-rated asset-backed securities” and will at first be limited to newly and recently originated auto, credit card, student, and SBA-guaranteed small business loans. The TALF funds will go out monthly starting in March, and they are already anticipating a program expansion for April that will include “asset backed securities (ABS) backed by rental, commercial, and government vehicle fleet leases and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment.” The Treasury and the Fed are also analyzing how to expand the program in future months to include commercial mortgage backed securities and other AAA-rated, newly issued ABS.

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It appears the Federal Reserve will announce this week a substantial round of investments through the Term Asset Backed Securities Loan Facility (TALF) program in securitized credit card, auto loan, student loan, and other consumer debt. These investments will be from the initial TALF program allocation of $200 billion. The Fed is now turning its attention to the commercial real estate sector and they appear to recognize this is the next "shoe about to drop" as mortgage holders are unable to refinance in today's marketplace. We anticipate the next round of TALF investments—made available by increasing the facility up to $1 trillion—will include a focus on the commercial sector.

In addition to its efforts on asset-backed loans, the Fed is also working, in concert with Treasury, to reassure dubious investors and potential investors in the banking sector that no institutions are going to fail and that nationalization of banks is not on the agenda. Reports in today's media that the government is contemplating taking up to a 40 percent stake in Citicorp may not allay these concerns however.

Another development of interest over the weekend was the assessment of the economy that emerged from the nation's governors after they met separately in Washington on Saturday with Federal Reserve Chairman Ben Bernanke and with Mark Zandi of Moody'sEconomy.com. In the hallways of the National Governors Association conference and in pages of newspapers like the New York Times, one could see that the combined effect of the two briefings to the Governors was to intensify their sense that recovery will be a very slow process. The Times article appearing in the paper on Sunday, cited pessimistic assessments from Democratic and Republican governors alike. Public pronouncements by both the Fed and Zandi have been diverging in recent weeks, with the Fed indicating the economy will begin to turn around in the second half of 2009 and with Zandi saying that is not likely until late in 2010. One can infer from the articles that followed the meetings that the Governors gave somewhat more weight to the Zandi assessment.

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The Federal Reserve announced two new programs today, committing an additional $800 billion in order to spur lending. U.S. Treasury Secretary Hank Paulson also announced that $20 billion from the Troubled Asset Relief Program (TARP) would be used to support one of the programs. The first, worth $600 billion, is aimed at helping the housing market; and the second Fed program, worth $200 billion, is directed at thawing the frozen consumer credit markets.

The Fed announced this morning that it will "initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae." The Fed will work with "primary dealers through a series of competitive auctions" for purchases of up to $100 billion in "GSE direct obligations" beginning next week. For purchases of up to $500 billion in MBS, the Fed will select asset-managers through a competitive process and plans to start these purchases before the end of the year. The Fed said in a release that it will provide operational details after "consultation with market participants," and added that "Purchases of both direct obligations and MBS are expected to take place over several quarters."

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