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Treasury Details Plan for Toxic Mortgages

The U.S. Treasury Department on Monday laid out ""details of its plan"":http://www.treasury.gov/press/releases/reports/ppip_whitepaper_032309.pdf to alleviate the toxic mortgage assets weighing heavy on banks' balance sheets - the fiscal burdens that many argue sent the entire national financial system into its headlong tailspin. The program would combine $75 billion to $100 billion from the government's bailout fund with private investors' capital to eventually buy as much as $1 trillion of those risky, distressed assets.
Initially, the new ""Public-Private Investment Program"":http://www.treasury.gov/press/releases/reports/ppip_fact_sheet.pdf will provide purchasing power for $500 billion in toxic assets, or what the government refers to as legacy assets. But the Treasury said the program can be expanded later to cover as much as $1 trillion in legacy asset purchases.
According to Treasury Secretary Timothy Geithner, both real estate loans held directly on the books of banks (legacy loans) and securities backed by mortgage portfolios (legacy securities) are causing the financial system to ""work against economic recovery.""
The Department's Public-Private Investment Program is intended to ""repair balance sheets throughout our financial system,"" and ""restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit,"" the Treasury explained in a ""press statement"":http://www.treasury.gov/press/releases/tg65.htm.
The Treasury said that by using government financing in partnership with co-investment from the private sector and debt guarantees by the FDIC, the purchasing power created will maximize taxpayer resources. The Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns, the Department explained.
In addition, 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 Treasury said this approach is ""superior to the alternatives"" of either hoping for banks to work these assets off their books on their own, which would likely only prolong the crisis, or instituting a ""bad bank"" through which the government would purchase the assets directly. If the government acts alone in directly purchasing legacy assets, the Department explained, taxpayers would take on all the risk, along with the additional risk that the government would overpay for the assets if it was setting the prices itself.
In an interview with _""The Wall Street Journal"":http://www.wsjonline.com_ on Sunday, Secretary Geithner said the only way to remove troubled assets clogging banks' balance sheets is to work with the private sector, even at a time when Wall Street moneymakers are being vilified by the public and politicians.
Geithner told the _Journal _that the government cannot fix the financial crisis alone. ""Our judgment is that the best way to get through this is if we can work with the markets,"" he said. ""We don't want the government to assume all the risk. We want the private sector to work with us.""
This same private market involvement has been purposed by _DS News _as a compelling means of advancing a housing recovery, with the publication's development and sponsorship of the ""Distressed Asset Roundtable and Exchange"":http://www.dsnewsdare.com (DARE) to be held in New York, May 12-13.
The Treasury said it expects ""a broad array of investors"" to participate in the Public-Private Investment Program, from individuals to pension plans and insurance companies. Other long-term investors such as hedge funds and regime-owned sovereign wealth funds would be prime candidates for participation, as they are some of the few entities on the sidelines with plenty of cash to invest.
To start the process for ""legacy loans"":http://www.treasury.gov/press/releases/reports/legacy_loans_faqs.pdf held by the banks, each institution will decide which assets - typically a pool of loans - they would like to sell. Financial institutions of all sizes are eligible to sell assets, and the FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee, with leverage not to exceed a 6-to-1 debt-to-equity ratio.
The FDIC will then 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. If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC, which would be collateralized by the purchased assets. The FDIC would receive a fee in return for its guarantee, and once the assets have been sold, private fund managers approved by the FDIC will control and manage the assets until final liquidation. The process is subject to strict FDIC oversight, the Treasury said.
For ""securities"":http://www.treasury.gov/press/releases/reports/legacy_securities_faqs.pdf backed by toxic mortgages, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets - through debt financing from the Federal Reserve under the newly launched Term Asset-Backed Securities Loan Facility (TALF) and with dollar-for-dollar government matches to private capital raised for dedicated funds targeting legacy securities. 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.
The Treasury said it would approve up to five ""asset managers"":http://www.treasury.gov/press/releases/reports/legacy_securities_ppif_app.pdf ""with a demonstrated track record of purchasing legacy assets,"" though it may consider adding more depending on the quality of applications received.
Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan to lay the foundations for economic recovery. In addition to the new Public-Private Investment Program, these efforts include the Making Home Affordable refinancing and loan modification program, the launch of TALF to jumpstart secondary markets and support consumer and business lending, and a new capital assistance program for banks.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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