On February 10, Treasury Secretary Timothy Geithner announced a comprehensive Financial Stability Plan to address the continuing credit crisis. Two aspects of the plan are expected to create new opportunities for private investment funds to take advantage of public financing to make private investments: one in respect of “legacy” troubled assets on the balance sheets of financial institutions and one in respect of newly issued, AAA-rated asset-backed securities (ABS).
First, the plan calls for the creation of a new $500 billion to $1 trillion Public-Private Investment Fund in which the Federal Deposit Insurance Corporation, Federal Reserve and Treasury Department will cooperate to pair public and private capital, including capital from private investment funds, to make large-scale purchases of “legacy” assets currently clogging the balance sheets of financial institutions. Originally, the Troubled Asset Relief Program(TARP) was to have involved the purchase by the government of large amounts of troubled residential and commercial mortgage loans and related securities and other assets from financial institutions, but private investment funds were specifically excluded from the list of entities who could take advantage of the program. In contrast, although few details are available, the Public-Private Investment Fund appears to be specifically targeted to provide financing to encourage purchases of such assets from financial institutions by private investment funds. Further, the announced intention of the plan is to allow the private buyers to determine the appropriate pricing for such purchases, even though substantial amounts of public moneys will be employed in the deals. Since details are not yet available, it is not clear what restrictions, disclosure requirements or other terms will apply.
Second, private investment funds should be able to access the significantly expanded version of the Term Asset-Backed Securities Loan Facility (TALF) program under the new “Consumer & Business Lending Initiative” to purchase newly issued AAA-rated eligible ABS. The new plan would expand the current TALF from $200 billion to up to $1 trillion and add commercial mortgage loans to the list of assets that may underlie eligible ABS. The other asset types are auto, student and Small Business Administration loans and credit card receivables with additional asset types under consideration by the Treasury and the Federal Reserve. Any private investment fund that is organized in the United States and managed by an investment manager that has its principal place of business in the United States is an eligible TALF borrower, excluding private investment funds and investment managers controlled by foreign governments. Private investment funds with U.S.-based managers organized outside of the United States may participate in the program through newly formed or existing subsidiaries organized in the United States so long as such subsidiaries are managed by the U.S.-based manager and otherwise meet the preceding requirements.