Financial Reform Watch

After nearly four months of delay, the Treasury on Wednesday launched the Legacy Securities program—a key component of the administration’s Public-Private Investment Program (PPIP) aimed at relieving financial institutions of illiquid assets that continue to hamper the flow of credit markets.

Scaling back the scope of the Legacy Securities program as originally envisioned in March, the Treasury, together with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, offered a framework that will provide government investments of up to $30 billion so that private sector fund managers and private investors might purchase legacy commercial mortgage-backed securities (MBS) and non-agency MBS off the balance sheets of banks and other financial institutions.

Selected from a pool of over 100 applicants, below is a list of the nine private fund managers pre-qualified by Treasury to participate in the initial round of the Legacy Securities program:

• AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC
• Angelo, Gordon & Co., L.P. and GE Capital Real Estate
• BlackRock, Inc.
• Invesco Ltd.
• Marathon Asset Management, L.P.
• Oaktree Capital Management, L.P.
• RLJ Western Asset Management, LP.
• The TCW Group, Inc.
• Wellington Management Company, LLP

Under the PPIP, all participating fund managers must invest at least $20 million of their own capital into a Public Private Investment Fund (PPIF) and raise at least $500 million from private investors within the first 12 weeks. In turn, Treasury will match all capital raised up to $10 billion and will provide debt financing for total equity up to $20 billion. Additionally, all eligible legacy securities must be issued before 2009 and possess an initial rating of AAA. Altogether, Treasury officials expect participating managers to raise as much as $10 billion.

Although Treasury officials described the PPIP investment as “modest in size,” they have stated publicly that larger public investments are no longer necessary considering the substantial improvements shown in the MBS markets since March, along with the improved ability of banks to raise capital. Since March, the 19 largest U.S. banks have raised more than $100 billion through the sale of equity, debt, and assets.

The other half of PPIP, the Legacy Loans program—intended to set up PPIFs that will purchase mortgage loans directly from participating banks—continues to stall. According to the statement released on Wednesday, the FDIC is continuing the program’s testing phase, but “remains committed to building a successful Legacy Loan Program for open banks and will be prepared to offer it in the future as needed.”