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Public-Private Investment Program overview

On March 23, 2009, the FDIC, the Federal Reserve, and the United States Treasury Department announced the Public-Private Investment Program for Legacy Assets. The program is designed to provide liquidity for so-called "toxic assets" on the balance sheets of financial institutions. This program is one of the initiatives coming out of the implementation of the Troubled Asset Relief Program (TARP) as implemented by the U.S. Treasury under Secretary Timothy Geithner. The major stock market indexes in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way. [1]

PPIP funds surge 36% on average in first year

A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year.

The eight funds created under the Public-Private Investment Program, or PPIP, reported net internal rates of return averaging 36 percent through Sept. 30, the Treasury Department said in a report this week. That compares with the 10 percent return for the Standard & Poor’s 500 Index and 8.2 percent for the BarCap U.S. Aggregate Total Return Index of bonds.

“The first year has been out of the ballpark,” Jeffrey S. Phlegar, who heads the PPIP fund run by New York-based money manager AllianceBernstein LP, said yesterday in a telephone interview.

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program. The government has gotten $215 million of interest, dividend and other payments, and the funds have more than $1.5 billion in unrealized gains. Under the wider Troubled Asset Relief Program, or TARP, the government has earned $25.2 billion on its investment of $309 billion in banks and insurers, an 8.2 percent return over two years, according to data compiled by Bloomberg.

First quarterly PPIP report

The U.S. Department of the Treasury today released the initial quarterly report for the Legacy Securities Public-Private Investment Program ("PPIP"). This report includes a summary of PPIP capital activity, portfolio holdings and current pricing, and fund performance. Treasury expects to provide additional information as the program matures in subsequent quarterly reports.

PPIP is designed to support market functioning and facilitate price discovery in the mortgage-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. The investment objective of PPIP is to generate attractive returns for taxpayers and private investors through long-term opportunistic investments in Eligible Assets (as defined below) by following predominantly a buy and hold strategy. Under the program, Treasury will invest up to $30 billion of equity and debt in public-private investment funds ("PPIFs") established by private sector fund managers for the purpose of purchasing Eligible Assets. The fund managers and private investors will also provide capital to the funds. PPIFs have eight-year terms which may be extended for consecutive periods of up to one-year each, up to a maximum of two years. To qualify for purchase by a PPIF, the securities must have been issued prior to 2009 and have originally been rated AAA – or an equivalent rating by two or more nationally recognized statistical rating organizations – without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets ("Eligible Assets").

AllianceBernstein, BlackRock, and Wellington closings approved for PPIP

The U.S. Department of the Treasury today announced three additional initial closings of Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP). AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC; BlackRock, Inc.; and Wellington Management Company, LLP have completed initial closings, each with at least $500 million of committed equity capital from private investors bringing the total number of initial closings completed to five and total committed equity and debt capital to $12.27 billion.

Small, minority-, and women-owned businesses that are partnering with the fund managers that have completed initial closings include:

  • Advent Capital Management, LLC
  • Altura Capital Group, LLC
  • Utendahl Capital Management

"The PPIP continues to grow," said Herb Allison, Assistant Secretary for Financial Stability, "Private capital is being drawn into the market for legacy securities and taxpayers are being given a chance to share in the profits."

Treasury expects that the remaining initial closings for the other PPIFs will occur throughout October. Following an initial closing, each PPIF will have the opportunity for two more closings over the following six months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private investor capital). Treasury will be providing updates as additional PPIF closings occur.

Summary of capital commitments made to date pursuant to PPIP

Invesco and TCW can start buying toxic assets

"The Treasury Department said Wednesday that two large investment funds have raised the minimum amounts needed to begin purchasing toxic assets from banks, finally launching this part of the government's financial rescue effort.

Invesco Ltd. and the TCW Group Inc. both cleared the $500 million target to begin operations to purchase toxic assets, according to Treasury.

They are among nine firms that received initial approval to participate in the program earlier this year. Treasury said it expected the other seven firms would be cleared to begin operations in the next month.

The goal of the program is to rid banks of bad loans so they can resume more normal lending, which is key for sustaining any economic recovery.

The initiative, known as the Public-Private Investment Program, has gotten off to a rocky start and some analysts wonder how successful it will be at buying banks' bad assets at bargain-basement prices.

Treasury's announcement comes nearly a year after Congress first approved the $700 billion Troubled Assets Relief Program, which was sold to lawmakers by then-Treasury Secretary Henry Paulson as an effort to buy up bad assets so banks could resume more normal lending.

However, Paulson put that effort aside in favor of directly injecting massive amounts of capital into banks, saying it would take too long to get the toxic asset program up and running.

In July, Treasury said nine firms had qualified for the PPIP program. They were given time to raise at least $500 million each, money that will be matched from the $700 billion bailout program.

Treasury on Wednesday said the two funds had closed on about $1.13 billion of private-sector capital commitments, pushing the total to $2.26 billion after the government match.

Invesco, which is headquartered in Atlanta, has ties with billionaire investor Wilbur Ross. His firm is now a subsidiary of Invesco. TCW Group, headquartered in Los Angeles, has more than $100 billion under management.

Treasury said the two funds also will be able to borrow additional amounts from Treasury, bringing their combined total resources to purchase toxic assets to about $4.52 billion.

The government's goal is to provide $30 billion in Treasury investment to all of the funds participating. With the contributions from the private sector, that will push the total available for purchase of toxic assets to $40 billion, Treasury said.

Treasury Secretary Timothy Geithner said he was pleased with the progress made in launching PPIP.

"This program allows Treasury to partner with leading investment management firms to increase the flow of private capital into the market for legacy securities and give taxpayers a chance to share in the profits," he said in a statement.

"The US Treasury on Wednesday pushed ahead with scaled back plans for public- private partnerships to buy toxic assets, naming nine fund managers and allocating $30bn of public funds, but without securing any further backing from the Federal Reserve.

Officially, the US central bank is still considering providing additional financing for investors buying bubble-era residential mortgage-backed securities, but its decision not to announce anything on Wednesday strongly suggests that it does not intend to take this step.

The Federal Deposit Insurance Corporation, meanwhile, said it remained committed to a pilot scheme under which it would provide debt guarantees for funds purchasing bubble-era loans, but initially only from failed banks.

The combined effort falls far short of the original plan for public-private joint ventures to purchase up to $1,000bn (€714bn, £625bn) in toxic securities and loans.

A senior administration official said a programme on this scale was no longer needed because of improvements in financial markets and bank capital raising, but added the operation could be scaled up if economic conditions deteriorated.

He said the public-private investment funds would still be big enough to make a material difference. “We are not trying to be the market, we are trying to jump-start the market,” he said.

However, critics say the scaled back plan is not large enough to restart liquidity in markets for toxic securities and that the continued presence of large amounts of toxic assets on bank balance sheets makes the US vulnerable if the economic outlook deteriorated again.

The nine fund managers –

  • Alliance Bernstein
  • Angelo Gordon
  • BlackRock
  • Invesco
  • Marathon
  • Oaktree
  • RLJ Western
  • TCW
  • Wellington

– will each be charged with raising at least $500m to purchase bubble-era securities including commercial and residential mortgage-backed securities.

Pimco, an asset manager widely expected to be on the list, issued a statement saying it had withdrawn in early June owing to “uncertainties regarding the design and implementation of the programme”.

The Treasury expects the nine fund managers will together raise $10bn in private capital, which the government will match with $10bn of public capital. Treasury is also willing to provide $20bn in loans, giving the funds firepower of roughly $40bn.

The fund managers will have the option of taking less government debt and a bit more equity if they want to take advantage of additional Fed financing restricted to top-rated commercial mortgage-backed securities. In theory this route would allow them to leverage up to five times total equity – although Fed haircuts could limit this to more like two or three times.

Fund managers will not be allowed to purchase assets from related parties, and individual investors will not be allowed to take more than 9.9 per cent stakes in the funds."

Background - the challenge of legacy assets

Source: Treasury Fact Sheet on PPIP

Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of “legacy assets” – both real estate loans held directly on the books of banks (”legacy loans”) and securities backed by loan portfolios (”legacy securities”). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.

Origins of the problem

The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.

Creation of a negative economic cycle

As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.

The Public-Private Investment Program for legacy assets

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three basic principles

Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

  • Maximizing the impact of each dollar:

First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

  • Shared risk/profits with private participants:

Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.

  • Private sector price discovery:

Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The merits of the Treasury approach

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. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

Two components for two types of assets

The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

  • Legacy Loans: The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
  • Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

The Legacy Loans Program

To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.

Involving private investors to set prices

A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.

Using FDIC expertise for oversight

The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.

Joint financing

Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.

Process for purchasing assets

Purchasing assets in the Legacy Loans Program will occur through the following process:

  • Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
  • Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
  • Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
  • Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

The Legacy Securities Program

The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these 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.

Expanding TALF to legacy securities

The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).

Providing investors greater confidence

As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.

Funding purchase of legacy securities

Through this new program, non-recourse 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 (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.

Working with market participants

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Partnering with private investment funds

Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.

Side-by-side investment with qualified fund managers

Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.

Offer of senior debt to leverage more financing

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.


US Treasury links for the PPIP program

BlackRock is putting together an investment fund that it says will give ordinary Americans a chance to profit from the financial bailouts that they are paying for. The company quietly filed plans on Friday to raise money for the vehicle.

For investors, the potential risks are considerable. The closed-end fund is to buy distressed mortgage securities from financial companies — the very investments that have hurt so many banks. It would be the first product aimed specifically at Main Street that is linked to the government’s now-diminished Public-Private Investment Program, which is meant to help purge these institutions of their worrisome investments.

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