Public-Private Investment Program For Legacy Assets - General

General

Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program (P-PIP) will generate $500 billion in purchasing power to buy legacy assets with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

• Maximizing the impact of each taxpayer dollar: first, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

• Shared risk and profits with private sector participants: second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private sector price discovery: third, 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.

PPIP uses a combination of private equity and Government equity and debt through TARP to facilitate purchases of legacy mortgage-backed securities (“MBS”) held by financial institutions. In July 2009, Treasury announced the selection of nine Public-Private Investment Fund (“PPIF”) managers. Treasury has obligated $21.9 billion in TARP funds to the program. In January 2010, PPIP manager The TCW Group Inc. (“TCW”) withdrew from the program. On April 3, 2012, PPIP manager Invesco announced it had sold all remaining securities in its portfolio and was in the process of winding up the fund. The remaining seven PPIP managers are currently purchasing investments and managing their portfolios.

According to Treasury, the purpose of the Public-Private Investment Program (“PPIP”) is to purchase legacy securities from banks, insurance companies, mutual funds, pension funds, and other eligible financial institutions as defined in EESA, through Public-Private Investment Funds (“PPIFs”). PPIFs are partnerships, formed specifically for this program, that invest in mortgage-backed securities using equity capital from private-sector investors combined with TARP equity and debt. A private-sector fund management firm oversees each PPIF on behalf of these investors. According to Treasury, the aim of PPIP was to “restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit.” PPIP originally included a Legacy Loans subprogram that would have involved purchases of troubled legacy loans with private and Treasury equity capital, as well as an FDIC guarantee for debt financing. TARP funds were never disbursed for this subprogram.

Treasury selected nine fund management firms to establish PPIFs. One PPIP manager, The TCW Group, Inc., (“TCW”) subsequently withdrew, and another PPIP manager, Invesco, announced recently that it has sold all remaining securities in its PPIP fund. Private investors and Treasury co-invested in the PPIFs to purchase legacy securities from financial institutions. The fund managers raised private-sector capital. Treasury matched the private-sector equity dollar-for-dollar and provided debt financing in the amount of the total combined equity. Each PPIP manager was also required to invest at least $20 million of its own money in the PPIF. Each PPIF is approximately 75% TARP funded. PPIP was designed as an eight-year program. PPIP managers have until 2017 to sell the assets in their portfolio. Under certain circumstances, Treasury can terminate it early or extend it for up to two additional years.

Treasury, the PPIP managers, and the private investors share PPIF profits and losses on a pro rata basis based on their limited partnership interests. Treasury also received warrants in each PPIF that give Treasury the right to receive a portion of the fund’s profits that would otherwise be distributed to the private investors along with its pro rata share of program proceeds.

The PPIP portfolio, consisting of eligible securities, was valued at $21.1 billion as of March 31, 2012, according to a process administered by Bank of New York Mellon, acting as valuation agent. That was $600 million higher than the portfolio value at the end of the previous quarter. The portfolio value was also affected by Invesco’s sale of its remaining securities in March 2012, discussed in greater detail in this section. In addition to the eligible securities, the PPIP portfolio also consists of cash assets to be used to purchase securities. The securities eligible for purchase by PPIFs (“eligible assets”) are non-agency residential mortgage-backed securities (“non-agency RMBS”) and commercial mortgage-backed securities (“CMBS”) that meet the following criteria:

• issued before January 1, 2009 (legacy)
• rated when issued AAA or equivalent by two or more credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”)
• secured directly by actual mortgages, leases, or other assets, not other securities (other than certain swap positions, as determined by Treasury)
• located primarily in the United States (the loans and other assets that secure the non-agency RMBS and CMBS)
• purchased from financial institutions that are eligible for TARP participation