Public-Private Investment Program

As part of President Obama’s economic recovery plan, the President and the Secretary of the Treasury, Timothy F. Geithner, announced the details of a public-private plan to buy up banks’ “toxic assets” and auction them off.

Administration officials outlined a three-part Public-Private Investment Program that offers private investors vast amounts of cheap, taxpayer-supported financing for every dollar they put up of their own money. The further expansion of the program would finance the purchase of existing troubled mortgage-backed securities, including those backed by commercial real estate loans.

The Treasury could infuse almost $1 trillion more into the toxic-asset effort through a program called the Term Asset-Backed Securities Loan Facility (TALF), a joint venture with the Federal Reserve. The Treasury would help finance a series of public-private investment funds to buy up unwanted mortgage-backed securities, or groups of mortgages that have been packaged into bonds with a credit rating.

According to the Treasury Secretary, the goal is to “use taxpayers’ money effectively and wisely to, again, help get credit flowing.” The idea is that banks will be relieved of the burden of carrying assets for which there is no market, freeing up cash and increasing the flow of credit for car, home, business, and other loans.

The Public-Private Investment Program will have banks bundle loans and offer them at auction. The Federal Deposit Insurance Corp. and Federal Reserve Bank would then lend money to large private investors that would bid on the loan packages. The Fed also would expand a program of loans – also up to $1 trillion – to entice private investors to buy mortgage-related securities. Five investment managers would be hired by the Treasury to raise pools of money, matched by the government dollar-for-dollar, that they would use to buy the troubled securities. The Treasury will also offer government loans to augment the money pools and increase the buying power of the managers.

The plan is to target legacy mortgage loans made during the housing boom, as well as securities – devalued assets, sitting on banks’ books – that haven’t traded since last year, when the mortgage-backed investment markets collapsed.

In response to the announcement, the Dow went up nearly 500 points, and the Standard & Poor’s 500-stock index rose more than 7%. There also are some positive signs for the housing market. The National Association of Realtors said existing-home sales rose 5.1% in February as buyers scooped up foreclosed homes. However, analysts warn that the recent gains could collapse just as quickly if the administration’s asset purchase program hits a snag or the housing market deteriorates further.

By: Present Value

Tags: Public-Private Investment Program, Real Estate
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