Details of Geithner’s plan: Welcomed?

The much awaited plan for the bank’s toxic assets called Public-Private Investment Program (PPIP) was today unveiled by Treasury Secretary Tim Geithner and the reaction of the markets seem to be telling of the general feedback.  When he revealed a vague plan last month, the Dow lost 382 points.  Now, he seems to be making it up with the major index opening significantly higher, albeit not as high as the point it dropped last month.  Investment management firms BlackRock and Pimco have already shown willingness to participate.

A summary of the plan follows:

  • Investments made by Treasury under PPIP intended to complement other components of Financial Stability Plan
  • Two key elements: Legacy Loans Program, which combines FDIC guarantee of debt financing with equity capital from private sector and Treasury (1/7; 6/7 from the PPI Fund) to support purchase of troubled loans from insured depositary institutions; and Legacy Securities Program, which combines financing from the Fed and Treasury through the TALF with equity capital from private sector and Treasury to address problem of troubled securities.
  • TARP funds to be used for investment alongside private capital

Legacy Loans Program

  • Banks will determine the assets they wish to sell and inform FDIC; eligibility for purchase to be determined by banks, banking regulators, FDIC and Treasury
  • Debt-to-equity financing will not exceed 6:1 ratio; equity to be split between Treasury and private investor
  • FDIC will auction the eligible pool of loans; winning bid defines price
  • Bank decides whether to accept price or not

Legacy Securities Program

  • Legacy securitization assets to include residential MBS, commercial MBS and ABS, which were all originally rated AAA
  • Loan rates, sizes and duration still to be determined
  • Five fund managers (FM) to be hired, applicants to be pre-qualified
  • Sources of funding:
    (1) FMs will raise private capital,  (2) to be matched dollar-for-dollar by Treasury
    (3) TALF also to be expanded up to a $1 trillion to lend for the purchase of legacy securities
    (4) FMs are also able to apply for senior debt from Treasury of up to 50% of a fund’s total equity capital; Treasury will consider up to 100% of a fund’s total equity capital with further restrictions

Following is Treasury’s whitepaper containing the full details of the plan:

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