$40 Billion In Troubled Bank Assets To Be Purchased Under PPIP

Joint Statement Issued On PPIP

The Treasury, Federal Reserve and the FDIC today released a joint statement on the plan to buy troubled bank assets under the Public-Private Investment Program (PPIP).  Nine chosen money management firms will purchase as much as $40 billion in troubled bank assets using mostly taxpayer money.  The goal of the PPIP is to hasten  recovery of the banking industry by removing troubled loans from bank’s balance sheets.

Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair

Legacy Asset Program

On March 23, 2009, the Treasury Department, the Federal Reserve, and the FDIC announced the detailed designs for the Legacy Loan and Legacy Securities Programs. Since that announcement, we have been working jointly to put in place the operational structure for these programs, including setting guidelines to ensure that the taxpayer is adequately protected, addressing compensation matters, setting program participation limits, and establishing stringent conflict of interest rules and procedures.

Today, the Treasury Department, the Federal Reserve, and the FDIC are pleased to describe the continued progress on implementing these programs including Treasury’s launch of the Legacy Securities Public-Private Investment Program.

Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs.

Legacy Securities Program

The Legacy Securities program is designed to support market functioning and facilitate price discovery in the asset-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. Improved market function and increased price discovery should serve to reinforce the progress made by U.S. financial institutions in raising private capital in the wake of the Supervisory Capital Assessment Program (SCAP) completed in May 2009.

The Legacy Securities Program consists of two related parts, each of which is designed to draw private capital into these markets.

Legacy Securities Public-Private Investment Program (“PPIP”)

Under this program, Treasury will invest up to $30 billion of equity and debt in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities. Thus, Legacy Securities PPIP allows the Treasury to partner with leading investment management firms in a way that increases the flow of private capital into these markets while maintaining equity “upside” for US taxpayers.

Legacy Loan Program

In order to help cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the FDIC and Treasury designed the Legacy Loan Program alongside the Legacy Securities PPIP.

The Legacy Loan Program is intended to boost private demand for distressed assets and facilitate market-priced sales of troubled assets. The FDIC would provide oversight for the formation, funding, and operation of a number of vehicles that will purchase these assets from banks or directly from the FDIC. Private investors would invest equity capital and the FDIC will provide a guarantee for debt financing issued by these vehicles to fund asset purchases. The FDIC’s guarantee would be collateralized by the purchased assets. The FDIC would receive a fee in return for its guarantee.

Cost Of PPIP Falls On Taxpayers

Originally, as much as $1 trillion dollars of troubled bank assets were to have been purchased under the government’s plan.  The much smaller $40 billion plan announced today seems to be more of a pilot program to gain operational experience so that the program can be quickly expanded should the need arise.

Critics have argued that the PPIP is nothing more than a thinly disguised bank bailout, structured to appear as a private enterprise endeavor due to intense public opposition against bailing out the banking industry.  Since the private investors are effectively putting up only 7% of the funds required with the remainder coming from the government, it would seem that if the troubled assets being purchased cannot be disposed of profitably, the taxpayer will bear the majority of the cost of this bank bailout program.

In addition, there are concerns that the troubled bank assets will not be purchased at true market prices.   If the intention is to quickly remove toxic assets from the banking system, why not follow the successful model used by the Resolution Trust Corp (RTC) during the last banking crisis?   Non performing loans and troubled assets were sold to the highest bidder and the risk of loss was placed on the investors, not the public.  The RTC rapidly and efficient disposed of toxic assets and the gain or loss went to the private investors who risked their own capital.  Banks and investors who made poor lending decisions should be the ones to bear the cost of their poor decisions, not the taxpayer.