The Treasury, along with the Federal Deposit Insurance Corporation and the Federal Reserve, announced a Public-Private Investment program as one more step in the government bid to restore confidence in the U.S. financial system.
The program will use between $75 billion and $100 billion from TARP capital and capital from private investors. The Treasury expects the program could generate between $500 billion and $1 Trillion in purchasing power for legacy assets.
The program will use government financing to make purchases in partnership with the FDIC, Fed and with private investors. Private investors and the government will share risk and profits. Meanwhile, private companies will compete to discover prices of the securities to be purchased.
The program has two components which include “legacy loans” and “legacy securities.”
For legacy loans, the government hopes to attract private apital to purchase the loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment.
In the loan purchase process, banks will first identify which assets they wish to sell, then the pools of loans will be auctioned off to the highest bidder by the FDIC, which will also provide financing. Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to FDIC oversight.
The legacy securities program has two parts to draw private capital. The first is through the expansion of an existing Federal Reserve program called the Term Asset-Backed Securities Loan Facility (TALF). While the program was limited to purchasing consumer debt securities, it will not grow to include additional types of securities including mortgage backed securities.
The second is by matching private capital raised for dedicated funds which target legacy securities. Treasury will select five asset managers that will have a period of time to raise private capital to target a designated type of asset.
Asset managers will be able to subscribe for senior debt for the fund in the amount of 100 percent.