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Treasury Program Illuminates Desperation
By Darryl Kelley
MidasLetter.com
Monday, March 23, 2009
The U.S. Treasury department under Tim Geithner is finally finding its footing as the primary agency in the United States government's propaganda toolbox to obscure the criminal acts by government and banking that resulted in this financial meltdown. The "Public-Private Investment Program" as it is being touted is yet another spoke the department's Financial Stability Plan, which it says will lay the foundations for economic recovery.
In the press release issued today, the Treasury Department unabashedly congratulates itself on self-proclaimed "successes" such as 'TALF' (Term Asset-Backed Securities Loan Facility), which it says it will expand by purchasing another $15 billion in securities "backed by Small Business Administration loans".
It also talks about the launch of a new "Capital Assistance Program" that it says will "include a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now - making it less likely that a more serious downturn will occur."
Most glaringly in the press release, liabilities held by banks, and formerly referred to as 'distressed' or 'toxic' assets have been re-branded 'Legacy Assets". This in reference to loans made by banks backed by residential mortgages that are now almost entirely underwater and delinquent.
It stipulates that the uncertainty surrounding balance sheets as a result of these legacy assets have contributed significantly to the frozen economy, and this uncertainty has led to a "Negative Economic Cycle".
It goes on to say, "The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own."
No mention is made in the press release of the destructive effects of the unregulated Credit Default Swap market or the continuous massive capital injections required by American Insurance Group (AIG) to stave off the collapse of these legacy assets. No reference is made to the abolition of the Glass Steagall Act as a contributing factor to the motivation for newly freed banks to free up capital by contracting CDS's to protect loan portfolios.
The desperate appeal to private equity to participate in the salvage of the legacy assets is laid out in detail in a supplement to the press release entitled "Legacy Securities Public-Private Investment Funds (PPIFs) - Frequently Asked Questions".
It describes Legacy Securities PPIFs as "investment funds that will invest in legacy securities on behalf of Treasury and private investors. They will be managed by qualifying private sector asset
managers ("Fund Mangers"), which will raise equity capital from private investors and receive
matching equity funds and leverage from Treasury. The goal of the Legacy Securities PPIFs is to
maximize returns for taxpayers and private investors."
The benefits for investors participating in the program are described as "restarting the
market for these legacy securities, freeing up balance sheets of financial institutions and enabling
the extension of new credit. The resulting process of price discovery is expected to reduce the
uncertainty about the condition of financial institutions holding these securities, potentially
enabling them to raise new private capital."
The essence of the plan is that the Treasury will match, dollar for dollar, private fund investors who purchase portfolios of these troubled assets, and leave the purchasing entity to control all management aspects of the investment. Minimum investment to qualify is $500 million.
Other qualifications required include:
- Demonstrated experience investing in Eligible Assets, including through performance
track records.
- A minimum of $10 billion (market value) of Eligible Assets currently under management.
- Demonstrated operational capacity to manage the Funds in a manner consistent with
Treasury's stated Investment Objective while also protecting taxpayers.
- Headquarters in the United States.
Eligible Assets include commercial mortgage backed securities and residential mortgage backed
securities originally issued prior to 2009. These securities must have been originally rated AAA
or an equivalent rating by two or more nationally recognized statistical rating organizations
without ratings enhancement. The eligible assets must be secured directly by the actual
mortgage loans, leases or other assets, and not by other securities (other than certain swap
positions, as determined by the Treasury). The loans and other assets underlying any Eligible
Asset must be situated predominantly in the United States.
Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.
As a final thinly veiled bribe, the press release includes the stipulation that "the program is not subject to executive compensation restrictions."
Darryl Kelley can be reached by email at dkelley (at) midasletter (dot) com.
SOURCE: http://www.midasletter.com/news/09032306_Treasury-program-illuminates-desperation.php
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