Earlier this week, we provided you with an Alert that summarized the terms of the Term Asset-Backed Securities Loan Facility (“TALF”) program. On Feb. 10, 2009, the Federal Reserve Board (the “Board”) announced that it will expand the TALF program. In addition, Treasury Secretary Timothy Geithner introduced the U.S. Department of the Treasury’s Financial Stability Plan (the “Plan”), which includes the establishment of a Public-Private Investment Fund that will provide government financing to facilitate purchases of illiquid assets.  

TALF Program

The Plan will increase the Treasury’s support for the TALF program from $20 billion to $100 billion so that the TALF program can now provide $1 trillion in financing to investors in newly issued “AAA” asset-backed securities (“ABS”). In addition, the Treasury’s Fact Sheet on the Plan indicates that the TALF will now provide financing for purchasers of commercial mortgage-backed securities (“MBS”). Although the Board’s press release does not confirm that this expansion has been made yet, it does state that the Board could broaden the eligible collateral to encompass commercial MBS, private-label residential MBS, and other ABS. The Fact Sheet on the Plan also indicates that the Treasury is discussing with the Board an expansion of the TALF program to include privatelabel residential MBS and assets collateralized by corporate debt, which presumably could include collateralized loan obligations (“CLOs”).  

Public-Private Investment Fund

Working together with the Board and the Federal Deposit Insurance Corporation, the Treasury will create the Public-Private Investment Fund to facilitate purchases of the “legacy” loans and securities that are now burdening the balance sheets of many financial institutions. The Secretary of the Treasury stated that this program would provide public capital and public financing to leverage private capital. Initially the program would have $500 billion of financing capacity, with the potential to expand up to $1 trillion. This new program is expected to use private capital and private asset managers to provide a market mechanism for valuing troubled and illiquid assets.  

The Secretary of the Treasury acknowledged that the structure of this program had not been determined, and said that the Treasury will seek input from market participants. One possibility would be to use a structure similar to TALF, with private funds and institutions using government-supported financing to leverage their purchases of illiquid and distressed assets from financial institutions. Another alternative would be for public and private funds to be invested side-by-side in investment vehicles formed to purchase these assets using government-supported financing and private asset management.

The Board is expected to announce the date that the TALF program will commence operations later this month. In addition, the Treasury is expected to make a further announcement seeking input from market participants and the public on a range of different structures for the Public-Private Investment Fund. If you would like to review the Board’s press release, Secretary Geithner’s remarks regarding the Plan, or the Treasury’s Fact Sheet on the Plan, please go to: http://www.federalreserve.gov/newsevents/press/monetary/20090210b.htm.