Posts Tagged ‘recovery plan’

Thoughts on Treasury’s Private Partnership Investment Plan

Monday, March 23rd, 2009

I’ve pretty much agreed with those who have been critical of the way Tim Geithner has handled the AIG and bank bailouts in Henry Paulson-like fasion. We will have to give the time plan to determine whether it was good or not (it works if it works); but at first glance, Geithner’s plan seems to get “bad assets” off the books of banks at a price private investors are willing to pay for it.

Sample Investment Under the Legacy Loans Program

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% 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.

There are many moving parts to the plan, but one of the important issues is whether the FDIC can properly determine the leveraging ratio for bad assets. One thing to note is that the FDIC has been getting a lot of practice in doing just that with the increasing rate of recent bank closings.

Downside – This may be the best available option, but taxpayers will be financing a significant portion of these “bad” bank assets for the next few years.

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