On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”). The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks. PPIP is part of the broader “Financial Stability Plan” introduced by President Obama. The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit. PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.
Legacy Loans Program
The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”). The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets. The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks. Each PPIF will be comprised of a joint venture between private investors and the Treasury. Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved. However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.
Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors. U.S. banks of all sizes will be eligible to participate in the program. U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell. Eligible assets are required to be predominately situated in the United States. The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties. The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio. The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.