Treasury to buy up to $1 trillion in toxic assets

I believe we may just have a program that will indeed help infuse the Housing market and in turn start the economic recovery we know is ahead of us. I was left with renewed enthusiasm regarding this program as it involves Government, Banking and the Private Sector partnership, with each group becoming a Stakeholder in the “Toxic Asset” pool, to ensure it creates a true sense of partnership, with each group taking ownership and stakeholdership in the solution. The process is listed below, look forward to our thoughts…Steve de Laveaga, Vice President of Sales and Marketing, Fidelity National Title

Treasury to buy up to $1 trillion in toxic assets

Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks in hopes banks will resume lending money once the toxic assets are off their books.

(3/23/2009)

The U.S. Treasury Department on Monday detailed a plan designed to help investors purchase as much as $1 trillion in toxic assets that remain on bank balance sheets. The Treasury Department said it would use $75 billion to $100 billion in Troubled Asset Relief Program funds and capital from private investors. The government said the Public-Private Investment Program will generate the $500 billion and the Federal Reserve and the Federal Deposit Insurance Corp. will provide the financing for the deals. Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks. The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books. The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does. "The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit," the Treasury said in a news release. Treasury said the plan was designed "to make the most of taxpayer resources." Many experts say that the government should set up a "bad bank" and purchase the toxic securities alone. “This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” according to a statement from the Treasury. Under the Treasury plan, private-sector participants will compete to establish a price. Treasury said that it expected a "broad array" of investors to participate in the program, including insurance firms. How the plan would work: Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC. Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector — in this example, $84 — would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages. Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity. Step 5: The Treasury would then provide 50 percent of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6. Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis — using asset managers approved and subject to oversight by the FDIC.

From Title Report March 2009.