Treasury’s recently announced Public-Private Partnership Investment Program (PIP program), represents the newest Treasury initiative aimed at opening credit by providing a new governmentassisted program for removing “toxic assets” from bank and financial investor balance sheets. Participation in the PIP program may provide interesting opportunities for banks, insurance companies, pension funds, equity funds, private equity participants and long-term investors. Caution is appropriate, however, as full details of the program have yet to be released.

The PIP program is an extension of the ongoing Treasury Troubled Asset Relief Program (“TARP”) and Term Asset-Backed Securities Facility (TALF). The existing Treasury programs have met with mixed reviews by the financial services industry since their introduction in the Fall of 2008, in large part because of the “strings” attached to participation in the programs. The PIP program does not appear initially to contain the same “strings,” however, it is still very new and many of the details have yet to emerge. While the purchase of troubled assets is not a new concept, the hope is that the private equity involvement will help establish appropriate market pricing for these assets.

The program consists of the sale of loan assets (Legacy Loans) by banks and sales of relevant real estate-related securities (Legacy Securities) by a variety of investors such as banks, insurance companies, pension funds, mutual funds, IRA accounts and other investor structures. Sales will take place through the FDIC, and the FDIC will continue to be involved in post-sale oversight of the assets. The process is intended to free up liquidity and provide a renewed secondary market for the assets, and it represents a unique combination of FDIC-guaranteed debt financing combined with Treasury and private equity.

The Legacy Loan Program is part of the existing Treasury TARP program, and the Legacy Securities Program is part of the existing Treasury TALF program. PIP investors will be pre-qualified by the FDIC.

As with all such programs, the devil is in the details, and there are many details yet to emerge. Banks, insurance companies, pension funds and other financial services providers and investors should be on the lookout for potential opportunities as further details regarding the program emerge. The FDIC has issued a request for comments regarding the Legacy Loan program by April 10, 2009. To submit comments and questions, interested parties should go to www.fdic.gov/llp/index.html.

Highlights of The Legacy Loan Program

Under the Legacy Loan Program; (1) Banks (together with their primary regulators) will identify the loans they desire to sell, and the FDIC will analyze the pool and determine how much of a guarantee they are willing to provide; (2) Pools will be auctioned by the FDIC to the highest bidder with private investment of up to 50 percent of equity, and the FDIC funding the remaining 50 percent of equity; (3) The FDIC will guarantee funding for the balance of the debt financing taken back by the selling bank, with a fee to the FDIC for its guarantee, and will oversee structuring of the resulting bank debt which the bank may then sell; and (4) Private managers will oversee the assets subject to FDIC oversight.

An example of participation in the PIP program as provided by Treasury would involve the sale of $100 in face value of “toxic loan assets” by a banking organization. The offering would be subject to competitive bidding in an FDIC-conducted auction, and in this example the FDIC has determined that the pool is eligible for a 6-to-1 debt-to-equity ratio. The high bidder in the private investor group in this example offers $84 for the pool, representing a $16 “haircut” on the loans. With $12 of equity split evenly between the private investor and the FDIC, the FDIC would provide a financing guaranty on the $72 balance. The FDIC would then provide oversight of servicing, management and disposition of the assets by the investor (and FDIC-approved asset managers) on an ongoing basis.

The mechanism for purchasing the assets will be “Public-Private Investment Funds.” FDIC leverage is limited to a 6-to-1 debt-to-equity ratio.

Gains and losses in the investment would be shared equally in this example (proportionately to their investments), with the FDIC subject to additional potential losses if the guarantee is called upon.

Highlights of the Legacy Securities Program

Under the Legacy Securities Program, Treasury will make non-recourse loans to fund purchases of legacy securitized assets such as RMBS, CMBS and ABS securities from banks, insurance companies and other financial institutions. Many details of the pricing and other aspects of this program are yet to be determined.

Treasury will enter into “side-by-side” co-investment/ leverage relationships with private investors for appropriate ABS securities issued prior to 2009 with origination ratings of AAA, and it will work closely with specific approved fund managers with experience in acquiring legacy assets. Treasury will participate in those relationships on an equal investment footing with the identified investors.

Treasury will also provide asset managers with the opportunity to subscribe for senior debt for the PIP Fund in the amount of 50 percent of total equity capital of the fund, and up to 100 percent subject to certain unnamed restrictions.

Conclusions

Recent history with the TARP program will likely (and understandably) make potential PIP participants wary as to what strings may be attached to the program now and in the future. Again the devil is in the details, but banks, insurance companies and other financial services providers should be on the lookout for potential opportunities under the PIP program as details regarding implementation emerge.