The Obama administration has been busy trying to restore confidence and stability in our economy. In February, the administration passed an enormous $787 billion stimulus plan meant to save or create 3.5 million jobs. In addition to job creation and stabilizing the economy, the American Recovery and Reinvestment Act aspires to improve our nation’s infrastructure, expand computerized technology in healthcare and propel the U.S. towards leading a global initiative in developing greener energy; the plan included an $8000 tax credit for first-time homebuyers and incentives for energy efficiency improvements on existing homes.
Also in February, Timothy Geithner briefly announced the Financial Stability Plan, of which one portion of the plan, the loan modification program, has already increased mortgage refinancing by 30%. The remaining portion of the Financial Stability Plan is the Public Private Investment Program, which is essentially a plan to create a government taxpayer sponsored bank that purchases toxic assets from banks, pension funds, insurance companies, mutual funds and funds held in individual retirement accounts.
The Public Private Investment Program is the Obama Administration’s newest venture aimed at minimizing the negative effects of failed mortgage lending practices. The new program will start with an initial capital investment of $75 – $100 billion from TARP funds, which will help finance $500 billion from the FDIC and Federal Reserve; the amount financed may increase to $1 trillion overtime. The plan makes taxpayers the proud owners of legacy loans and securities that burden banks and other financial institutions.
From the Government Press Release
Legacy Loans: The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.
The plan has three important aspects:
- Use capital from the Treasury and financing from the FDIC and Federal Reserve to rally capital from private investors.
- Private investors and taxpayers will share in the risks and rewards of the program; the funds will be open to all types of investors such as investors in pension funds and mutual funds.
- MOST IMPORTANT – Private sector investors who purchase the assets will establish the value of the loans and securities purchased; this will protect the taxpayers from over paying.
The plan sets the government and taxpayers up for investment in real estate related assets that saddle bank balance sheets with risky investments. This new program may work, and it may not, but one thing is certain – the government is too big to fail.
I hope these assets don’t bring our government closer to failure. The good news about the plan is that the asset values have decreased greatly and we may get a good deal on them, the bad news is that these new assets will become 1 more liability for taxpayers and the government.
Here are some sample investment scenarios provided by the Government:
Legacy Loans
- Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
- Step 2:The FDIC would determine that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
- Step 3:The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
- Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
- Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
- Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
Legacy Securities
- Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
- Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
- Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
- Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
- Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
- Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.
Do you think the Public Private Investment Program is a good idea?
Sources:
Geithner: My Plan for Bad Bank Assets
U.S. Treasury ‘White Paper’ on Buying ‘Legacy’ Assets
Treasury Department Releases Details on Public Private Partnership Investment Program
See Also:
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At least it is still a method to solve the issue. However, I felt that they are throwing money into the sea and try to earn back the money after the economy is back to the usual shape.
It is the methodology which Obama should implement to create confidence in the mind of investors so as to stimulate the economy as its best.
Yes, I think Obama is doing right. ”The 8000$ tax credit for the first-time homebuyers” has together with many States extra credit mortgage, has already showing that more houses is starting building and buying. And together with the other program, he show at lest he try to do something instead to do noting.
People are moving forward because of the credit, but a lot of people are complaining because they just bought a place. The old adage is true, you can’t please everybody. If they can get rid of these toxic assets (banks) they have a good chance of getting back on their feet. Which means credit will flow, people will be able to buy things and the economy will move forward.
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It’s an interesting idea as there are many private investors ready to jump into these toxic assets. If government is willing to become partners with private investors, then we may actually have a chance of recovering from this mess.
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The PPIP is dead before it ever gets going