On March 23, 2009, the U.S. Treasury (Treasury), in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve (Fed), announced the creation of the Public-Private Investment Program (PPIP) as part of its continuing efforts to improve the financial condition of U.S. financial institutions and improve consumer and business credit markets. The PPIP addresses "legacy" (pre-2009) real estate loans (Legacy Loans) and mortgage-backed securities (Legacy MBS) and is designed to draw new private capital into the market for these assets by providing government equity and attractive public debt financing. The Treasury and the Fed also announced the expansion of the Term Asset-Backed Securities Loan Facility (TALF) program to fund purchases of Legacy MBS as well as legacy, consumer credit asset-backed securities (Legacy ABS).

The Legacy Loans Program component of the PPIP combines equity capital from the private sector and the Treasury (on a 50/50 basis) with an FDIC guarantee of debt financing to fund the purchase by Public-Private Investment Funds (PPIFs) of Legacy Loans from insured depository institutions. Depository institutions will be eligible to sell Legacy Loans under the Legacy Loans Program, as determined by the institution and the institution's primary banking regulator, the FDIC, and the Treasury. A PPIF's ratio of debt (subject to the FDIC guarantee) to equity shall not exceed six to one. Eligible pools of Legacy Loans, with committed FDIC-guaranteed financing (initially, expected to be provided by the selling institution), will be auctioned by the FDIC to qualified bidders, with the selling bank having the right to accept or reject the offer price. Once the transaction has been completed, the private capital partner will control and manage the Legacy Loans until final disposition, subject to strict oversight from the FDIC. The FDIC-guaranteed financing will be collateralized by the purchased Legacy Loans and the FDIC will receive a to-be-determined fee in return for its guarantee. The exact requirements and structure of the Legacy Loans Program remain subject to notice and public comment.

The Legacy Securities Program component of the PPIP combines private sector equity capital with equity and debt capital from the Treasury, which can be supplemented with financing from the Federal Reserve and the Treasury through the expanded TALF program, to fund the purchase by PPIFs of Legacy MBS that were originally rated AAA. Under this program, private investment managers may apply for qualification as a Fund Manager (FM). To be considered as an FM, interested asset managers must submit an application to the Treasury by 5:00 p.m. EDT on April 10, 2009. The Treasury expects to inform applicants of their pre-qualification on or prior to May 1, 2009, after which pre-qualified applicants will have a limited period of time to raise at least $500 million of committed private equity capital before receiving final FM approval from the Treasury. The Treasury initially expects to approve approximately five FMs. The private capital raised by an FM will be matched with equity capital from the Treasury and, subject to certain criteria, debt financing from the Treasury at a to-be-determined rate. Treasury debt financing will be secured by the eligible Legacy MBS. One caveat to the Legacy Securities Program is that only those financial institutions from which the Secretary of the Treasury may purchase assets pursuant to Section 101(a)(1) of the Emergency Economic Stabilization Act of 2008 (EESA) are qualified to sell eligible Legacy MBS under this program. PPIFs may also finance the purchase of eligible Legacy MBS through the expanded TALF program in which case the TALF financing will be senior to the financing by the Treasury.

Though no details were provided, the Treasury's announcement noted that the Treasury would receive or take warrants as part of these two programs, as required by the EESA, and that the executive compensation restrictions would not apply to "passive private investors" participating in these programs. Also, the Treasury's equity and debt commitments under these two programs will count against the $700 billion troubled asset relief program cap in the EESA.

In addition to the above programs, the Treasury and Fed announced the expansion of the TALF program to permit the non-recourse financing of Legacy MBS as well as Legacy ABS. Leverage ratios (haircuts) are to be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations remain to be determined for these asset classes.

Though the Treasury's announcement and related releases provide a great deal of detail on these very important programs, many details and questions remain. Ballard Spahr is at the forefront of these programs and remains committed to keeping you informed as further details are announced.  

If you have any questions, please contact the co-chairs of the Economic Stabilization and Recovery Initiative:

                Dominic J. De Simone, (215.864.8704; desimone@ballardspahr.com)

                Thomas A. Hauser, (410.528.5691; hauser@ballardspahr.com)


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