Public Private Investment Program (PPIP)
Background
On March 27th, 2009 the Treasury Department announced the creation of the Public Private Investment Program (PPIP) which has been created to jumpstart the private secondary market for residential loans and mortgage backed securities. The PPIP consists of two smaller programs – the Legacy Loan Program and the Legacy Securities Program. The programs will use $75 - $100 billion of TARP funds and capital from private investors to generate $500 billion to purchase troubled assets, with the potential to expand to $1 trillion over time.
The goal is to couple government financing with private financing to maximize purchasing power.
Details
Legacy Loan Program
The Legacy Loan Program would encourage private investors to buy loans from banks in the following way:
- A bank would assemble a pool of residential mortgage loans it is seeking to divest. For example, assume the mortgages have a face value of $100.
- The FDIC would determine the amount of funding it would guarantee, not to exceed a 6-to-1 debt-to-equity ratio.
- The pool would be auctioned by the FDIC to private sector bidders. The highest bidder (in this example, $84) would form a Public-Private Investment Fund to purchase the pool.
- Of the $84 purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC of $72, leaving $12 of equity.
- Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury and the investor would each invest $6.
- The private investor would manage the servicing of the asset pool and the timing of the sale of the pool, with oversight by the FDIC.
Legacy Securities Program
The Legacy Securities Program consists of two related parts to draw private capital into the mortgage-backed securities market by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility and through matching private capital.
Eligible assets are expected to include certain non-agency residential mortgage-backed securities that were originally AAA-rated and outstanding commercial mortgage-backed securities and asset-backed securities that are AAA-rated.
Treasury will launch the application process for managers interested in the program.
- A fund manager would submit a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
- The government agrees to provide a one-to-one match for every dollar of private capital that the fund manager raises.
- For example, the fund manger raises $100 of private capital. Treasury provides $100 equity co-investment and provides a $100 loan to the Public-Private Investment Fund. Treasury will also consider an additional loan up to $100 to the fund.
- The fund manager has $300 (or possibly $400) in total capital with which to purchase the securities.
- The fund manager has full discretion in investment decisions, but will predominantly follow a long-term buy-and-hold strategy. The investment fund would be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.
The Treasury indicated that executive compensation restrictions will not apply to either the Legacy Loan Program or the Legacy Securities Program. Additional details of the programs will be fleshed