More Details of Toxic Assets Program by Regulators

The Treasury Department released key details today of its long-awaited Legacy Securities Public-Private Investment Program, which is designed to relieve banks of toxic assets. In a join statement , the Treasury Department, the Federal Reserve, and the FDIC, announced they would invest $30 billion of equity and debt in the effort, much smaller than initially envisioned.

From the FDIC:

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.

Initially, the Legacy Securities PPIP will participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities. To qualify, for purchase by a Legacy Securities PPIP, these securities must have been issued prior to 2009 and have originally been rated AAA — or an equivalent rating by two or more nationally recognized statistical rating organizations — without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets (“Eligible Assets”).

emphasis added

Also today, the Treasury said it had selected nine private firms to run the investment funds that will purchase the toxic assets. The nine firms selected are: AllianceBernstein, BlackRock, Invesco, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, The TCW Group, Wellington Management Company and a joint venture between Angelo, Gordon & Co. and GE Capital Real Estate. What happened to PIMCO?

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