The US Treasury's scheme to purchase toxic mortgage-backed securities was officially launched yesterday with the unveiling of the asset managers charged with investing public funds, while officials sought to quell claims the scheme has been dramatically scaled back in size and scope.
The legacy securities programme (LSP) of the Public-Private Investment Program (PPIP) will see an initial pool of nine fund managers seeking to raise a minimum of $500 million each in order to receive matching debt and equity worth $30 billion from the Treasury.
That figure is substantially smaller than the $75 billion to $100 billion from the $700 billion Troubled Assets Relief Program that was initially allocated to purchase toxic commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) under the LSP and toxic whole loans under the legacy loans programme (LLP), when the scheme was announced on March 23.
At the time, US Treasury secretary Timothy Geithner suggested the scheme would initially create $500 billion in purchasing power to buy legacy loans and securities, with the potential to eventually expand to up to $1.1 trillion as funds from other government initiatives such as the Term Asset-Backed Securities Loan Facility (Talf) could be rolled into the PPIP.
The nine asset managers selected to operate public-private investment funds (PPIFs) and buy toxic assets with taxpayer's money are: AllianceBernstein; Angelo, Gordon & Co; BlackRock; Invesco; Marathon Asset Management; Oaktree Capital Management; RLJ Western Asset Management; TCW Group; and Wellington Management Company.
The Treasury said the selection was made on the basis of the nine firms' demonstrated capacity to raise at least $500 million of private capital, their experience investing in RMBS and CMBS, and the fact they all have a minimum of $10 billion of PPIP-eligible assets under management. Each fund manager will have 12 weeks to raise the necessary $500 million, and will also be required to invest a minimum of $20 million of firm capital into their PPIF.
"We're committing $30 billion of Treasury capital, with $10 billion in matching equity against the $10 billion that will be raised from the private sector, and $20 billion of additional debt financing from the Treasury, which will bring it up to a total of $40 billion. The PPIFs have the opportunity to access Talf leverage as appropriate and allowed by the Federal Reserve so that could add additional purchasing power," said a senior Treasury official.
The official maintained the $30 billion sum of the LSP did not represent a retreat from the initial $75 billion–$100 billion PPIP total comprising both the securities and whole loan purchase elements of the scheme, and suggested the programme could grow larger in future.
"The $75 billion to $100 billion that was budgeted originally was split between the LSP and the LLP and with additional capital allocated for Talf as needed. While the programme might seem modest we are prepared to expand the resources committed to these programmes as markets evolve," he added.
The official refused to answer questions about the fate of the LLP, which was postponed by the Federal Deposit Insurance Corporation (FDIC) in early June on the grounds that increasing availability of private capital to financial institutions might have reduced the need for the programme for the time being. Rather, the FDIC will test the funding mechanism contemplated by the LLP in a sale of receivership assets later this quarter, with the deposits insurer expecting to solicit bids for this sale of receivership assets in July.
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