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Banking and
Financial Institutions Law Update
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Banking and
Financial Institutions Team Leaders
Jean
M. Weipert
Team Members
William G. Asimakis,
Jr.
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BEYOND THE "TARP"
THE FINANCIAL STABILITY PLAN:
PUBLIC-PRIVATE INVESTMENT
PROGRAM
The Obama
administration today added a new arrow to its quiver in combating the
current financial crisis by announcing a program designed to deal
with what many experts believe is at the root of the turmoil in our
economy. The Public-Private Investment Program will target
troubled real estate legacy assets - both whole loans and
securitizations backed by loan portfolios. Using $75 billion to
$100 billion in TARP capital, together with private capital, and
through targeted investments in multiple Public-Private Investment
Funds ("PPIFs"), the Public-Private Investment Program aims
to generate $500 billion in purchasing power to buy legacy assets
with the potential to expand to $1 trillion over time.
The
Public-Private Investment Program has two parts. The Legacy
Loans Program seeks to attract private capital to purchase eligible
loan assets from participating banks through the provision of FDIC
debt guarantees and Treasury equity co-investment. Financial
institutions of all sizes will be eligible to sell assets under the
Legacy Loans Program. To begin the process, banks will identify
to the FDIC the assets, typically a pool of loans, that they wish to
sell. Assets eligible for purchase will be determined by the
participating banking organizations, including primary banking
regulators, the FDIC and the Treasury. To help protect taxpayer
dollars, the FDIC will employ contractors to analyze the pools and
will determine the level of debt to be issued by a PPIF that the FDIC
is willing to guarantee (in no event to exceed a 6 to 1 debt to
equity ratio). An eligible pool of loans, with committed
financing, will then be auctioned by the FDIC to qualified
bidders. Private investors will bid for the opportunity to
contribute 50% of the equity for the PPIF, with the Treasury
contributing the remainder. The winning bid for this equity
stake, together with the amount of debt the FDIC is willing to
guarantee (based on the predetermined debt to equity ratio), would
define the price offered to the selling bank. The bank would
then decide whether to accept the offer. Once a pool of loans
has been purchased, the private capital partners would control and
manage the assets until final liquidation, subject to strict
oversight from the FDIC.
The second arm
of the Public-Private Investment Program is the Legacy Securities
Program which itself has two parts. The first part of the
Legacy Securities Program is the expansion of the Treasury's and the
Federal Reserve's current Term Asset-Backed Securities Loan Facility
("TALF") program (which may now total as much as $1
trillion) to include non-recourse loans to fund purchases of legacy
assets tied to residential and commercial real estate and consumer
credit. Eligible assets are expected to include certain non-agency
residential mortgage-backed securities ("RMBS") that were
originally rated AAA, and outstanding commercial mortgage-backed
securities ("CMBS") and asset backed securities
("ABS") that are rated AAA. Eligibility criteria of
borrower/investors, haircuts, lending rates, minimum loan sizes and
loan durations are yet to be determined for this aspect of the Legacy
Securities Program and will be informed by discussions with market
participants.
Along with
this effort, the Treasury will partner with private fund managers to
support the market for legacy securities. Private investment
managers will have the opportunity to apply for qualification as a
Fund Manager ("FM"), and Treasury expects to approve
approximately five FMs with the possibility of adding more depending
on application quality. Approved FMs will have a period of time
to raise private capital to target the designated asset classes
(initially expected to be non-agency RMBS and CMBS originated prior
to 2009 with a rating of AAA at origination). Treasury equity
capital will be invested on a fully side-by-side basis with these
private investors in each PPIF. Furthermore, FMs will have the
ability, to the extent their fund structures meet certain guidelines,
to subscribe to Treasury for senior debt for the PPIFs in an amount
of up to 50% of a fund's total equity capital, and in certain
circumstances and with additional restrictions, in an amount of up to
100% of a fund's total equity capital. These senior loans would
be structurally subordinated to any financing extended by the Federal
Reserve to these PPIFs via the TALF.
Clark
Hill will strive to keep you consistently updated and informed about
the Troubled Asset Relief Program, the Financial Stability Plan, the
Public-Private Investment Program and the government's evolving
response to the turmoil in our capital markets. Please click here to view our
previously distributed newsletters.
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To find out
more about Clark Hill and our Banking and Financial Institutions
Law Group, visit clarkhill.com
or call 800.949.3124
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