The treasury investment program

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If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now—making it less likely that a more serious downturn will occur. The Challenge of Legacy Assets: 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. 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 de-leveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.

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If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now—making it less likely that a more serious downturn will occur. The Challenge of Legacy Assets: 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.

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 trsasury and banks to reduce risk triggered a wide-scale de-leveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.

The excessive discounts embedded in some legacy asset prices are now straining the capital of U. 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. 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 ibvestment throughout our financial system progra, ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

The Public-Private Investment Program will be designed around three basic principles:. The Merits of This Approach: This approach is superior to the alternatives of either hoping treasuru banks to gradually work these assets investmennt 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:. 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. 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. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. 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, proogram primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets. Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis—using asset managers approved and subject to oversight by the FDIC.

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 orogram 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 investtment targeting legacy securities.

Expanding TALF to Legacy Securities to Bring Private Investors Back treasjry the Market : 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 iinvestment incorporate this program into the previously announced Term Asset-Backed Securities Facility. 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.

Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will the treasury investment program 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. Step 1 : Treasury will invewtment the application process for managers interested in the Legacy Securities Program.

Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury. Trewsury 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund. Step 6: The imvestment manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy.

The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched. Share to facebook Share to twitter Share to linkedin The Financial Stability Plan—Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that—alongside the American Recovery and Reinvestment Act—lay the foundations for economic recovery: —Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows.

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 progam 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.

The Public-Private Investment Program will be designed around three basic principles: —Maximizing the Impact of Each Taxpayer 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. 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.

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