Treasury Department Releases Details on Public Private Partnership Investment Program. Fact Sheet Public-Private Investment Program

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1 Adbe Acrbat Reader. March 23, 2009 tg-65 Treasury Department Releases Details n Public Private Partnership Investment Prgram Fact Sheet Public-Private Investment Prgram View White Paper and FAQs at The Financial Stability Plan Prgress S Far: Over the past six weeks, the Treasury Department has implemented a series f initiatives as part f its Financial Stability Plan that alngside the American Recvery and Reinvestment Act lay the fundatins fr ecnmic recvery: Effrts t Imprve Affrdability fr Respnsible Hmewners: Treasury has implemented prgrams t allw families t save n their mrtgage payments by refinancing, assist respnsible hmewners in aviding freclsure thrugh a lan mdificatin plan, and, alngside the Federal Reserve, help bring mrtgage interest rates dwn t near histric lws. This past mnth, the 30% increase in mrtgage refinancing demnstrated that wrking families are benefiting frm the savings due t these lwer rates. Cnsumer and Business Lending Initiative t Unlck Frzen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in cnjunctin with the Federal Reserve t jumpstart the secndary markets that supprt cnsumer and business lending. Last week, Treasury annunced its plans t purchase up t $15 billin in securities backed by Small Business Administratin lans. Capital Assistance Prgram: Treasury has als launched a new capital prgram, including a frward-lking capital assessment undertaken by bank supervisrs t ensure that banks have the capital they need in the event f a wrse-than-expected recessin. If banks are cnfident that they will have sufficient capital t weather a severe ecnmic strm, they are mre likely t lend nw making it less likely that a mre serius dwnturn will ccur. The Challenge f Legacy Assets: Despite these effrts, the financial system is still wrking against ecnmic recvery. One majr reasn is the prblem f "legacy assets" bth real estate lans held directly n the bks f banks ("legacy lans") and securities backed by lan prtflis ("legacy securities"). These assets create uncertainty arund the balance sheets f these financial institutins, cmprmising their ability t raise capital and their willingness t increase lending. Origins f the Prblem:The challenge psed by these legacy assets began with an initial shck due t the bursting f the husing bubble in 2007, which generated lsses fr investrs and banks. Lsses were cmpunded by the lax underwriting standards that had been used by sme lenders and by the prliferatin f cmplex securitizatin prducts, sme f whse risks were nt fully understd. The resulting need by investrs and banks t reduce risk triggered a wide-scale deleveraging in these markets and led t fire sales. As prices declined, many traditinal investrs exited these markets, causing declines in market liquidity. Creatin f a Negative Ecnmic Cycle: As a result, a negative cycle has develped where declining asset prices have triggered further deleveraging, which has in turn led t further price declines. The excessive discunts embedded in sme legacy asset prices are nw straining the capital f U.S. financial institutins, limiting their ability t lend and increasing the cst f credit thrughut the financial system. The lack f clarity abut the value f these legacy assets has als made it difficult fr

2 sme financial institutins t raise new private capital n their wn. The Public-Private Investment Prgram fr Legacy Assets T address the challenge f legacy assets, Treasury in cnjunctin with the Federal Depsit Insurance Crpratin and the Federal Reserve is annuncing the Public-Private Investment Prgram as part f its effrts t repair balance sheets thrughut ur financial system and ensure that credit is available t the husehlds and businesses, large and small, that will help drive us tward recvery. Three Basic Principles: Using $75 t $100 billin in TARP capital and capital frm private investrs, the Public-Private Investment Prgram will generate $500 billin in purchasing pwer t buy legacy assets with the ptential t expand t $1 trillin ver time. The Public- Private Investment Prgram will be designed arund three basic principles: Maximizing the Impact f Each Taxpayer Dllar: First, by using gvernment financing in partnership with the FDIC and Federal Reserve and c-investment with private sectr investrs, substantial purchasing pwer will be created, making the mst f taxpayer resurces. Shared Risk and Prfits With Private Sectr Participants: Secnd, the Public- Private Investment Prgram ensures that private sectr participants invest alngside the taxpayer, with the private sectr investrs standing t lse their entire investment in a dwnside scenari and the taxpayer sharing in prfitable returns. Private Sectr Price Discvery: Third, t reduce the likelihd that the gvernment will verpay fr these assets, private sectr investrs cmpeting with ne anther will establish the price f the lans and securities purchased under the prgram. The Merits f This Apprach: This apprach is superir t the alternatives f either hping fr banks t gradually wrk these assets ff their bks r f the gvernment purchasing the assets directly. Simply hping fr banks t wrk legacy assets ff ver time risks prlnging a financial crisis, as in the case f the Japanese experience. But if the gvernment acts alne in directly purchasing legacy assets, taxpayers will take n all the risk f such purchases alng with the additinal risk that taxpayers will verpay if gvernment emplyees are setting the price fr thse assets. Tw Cmpnents fr Tw Types f Assets: The Public-Private Investment Prgram has tw parts, addressing bth the legacy lans and legacy securities clgging the balance sheets f financial firms: Legacy Lans:The verhang f trubled legacy lans stuck n bank balance sheets has made it difficult fr banks t access private markets fr new capital and limited their ability t lend. Legacy Securities: Secndary markets have becme highly illiquid, and are trading at prices belw where they wuld be in nrmally functining markets. These securities are held by banks as well as insurance cmpanies, pensin funds, mutual funds, and funds held in individual retirement accunts.

3 The Legacy Lans Prgram: T cleanse bank balance sheets f trubled legacy lans and reduce the verhang f uncertainty assciated with these assets, the Federal Depsit Insurance Crpratin and Treasury are launching a prgram t attract private capital t purchase eligible legacy lans frm participating banks thrugh the prvisin f FDIC debt guarantees and Treasury equity c-investment. Treasury currently anticipates that apprximately half f the TARP resurces fr legacy assets will be devted t the Legacy Lans Prgram, but ur apprach will allw fr flexibility t allcate resurces where we see the greatest impact. Invlving Private Investrs t Set Prices: A brad array f investrs are expected t participate in the Legacy Lans Prgram. The participatin f individual investrs, pensin plans, insurance cmpanies and ther lng-term investrs is particularly encuraged. The Legacy Lans Prgram will facilitate the creatin f individual Public-Private Investment Funds which will purchase asset pls n a discrete basis. The prgram will bst private demand fr distressed assets that are currently held by banks and facilitate market-priced sales f trubled assets. Using FDIC Expertise t Prvide Oversight: The FDIC will prvide versight fr the frmatin, funding, and peratin f these new funds that will purchase assets frm banks. Jint Financing frm Treasury, Private Capital and FDIC: Treasury and private capital will prvide equity financing and the FDIC will prvide a guarantee fr debt financing issued by the Public-Private Investment Funds t fund asset purchases. The Treasury will manage its investment n behalf f taxpayers t ensure the public interest is prtected. The Treasury intends t prvide 50 percent f the equity capital fr each fund, but private managers will retain cntrl f asset management subject t rigrus versight frm the FDIC. The Prcess fr Purchasing Assets Thrugh The Legacy Lans Prgram: Purchasing assets in the Legacy Lans Prgram will ccur thrugh the fllwing prcess: Banks Identify the Assets They Wish t Sell: T start the prcess, banks will decide which assets usually a pl f lans they wuld like t sell. The FDIC will cnduct an analysis t determine the amunt f funding it is willing t guarantee. Leverage will nt exceed a 6-t-1 debt-t-equity rati. Assets eligible fr purchase will be determined by the participating banks, their primary regulatrs, the FDIC and Treasury. Financial institutins f all sizes will be eligible t sell assets. Pls Are Auctined Off t the Highest Bidder: The FDIC will cnduct an auctin fr these pls f lans. The highest bidder will have access t the Public-Private Investment Prgram t fund 50 percent f the equity requirement f their purchase. Financing Is Prvided Thrugh FDIC Guarantee: If the seller accepts the purchase price, the buyer wuld receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt wuld be cllateralized by the purchased assets and the FDIC wuld receive a fee in return fr its guarantee. Private Sectr Partners Manage the Assets:Once the assets have been sld, private fund managers will cntrl and manage the assets until final liquidatin, subject t strict FDIC versight. Sample Investment Under the Legacy Lans Prgram Step 1: If a bank has a pl f residential mrtgages with $100 face value that it is seeking t divest, the bank wuld apprach the FDIC. Step 2: The FDIC wuld determine, accrding t the abve prcess, that they wuld be willing t leverage the pl at a 6-t-1 debt-t-equity rati. Step 3: The pl wuld then be auctined by the FDIC, with several private sectr bidders submitting bids. The highest bid frm the private sectr in this example, $84 wuld be the winner and wuld frm a Public-Private Investment Fund t purchase the pl f mrtgages. Step 4: Of this $84 purchase price, the FDIC wuld prvide guarantees fr $72 f financing, leaving $12 f equity. Step 5: The Treasury wuld then prvide 50% f the equity funding required n a side-by-side basis with the investr. In this example, Treasury wuld invest

4 apprximately $6, with the private investr cntributing $6. Step 6: The private investr wuld then manage the servicing f the asset pl and the timing f its dispsitin n an nging basis using asset managers apprved and subject t versight by the FDIC. The Legacy Securities Prgram: The gal f this prgram is t restart the market fr legacy securities, allwing banks and ther financial institutins t free up capital and stimulate the extensin f new credit. The resulting prcess f price discvery will als reduce the uncertainty surrunding the financial institutins hlding these securities, ptentially enabling them t raise new private capital. The Legacy Securities Prgram cnsists f tw related parts designed t draw private capital int these markets by prviding debt financing frm the Federal Reserve under the Term Asset-Backed Securities Lan Facility (TALF) and thrugh matching private capital raised fr dedicated funds targeting legacy securities. 1. Expanding TALF t Legacy Securities t Bring Private Investrs Back int the Market: The Treasury and the Federal Reserve are tday annuncing their plans t create a lending prgram that will address the brken markets fr securities tied t residential and cmmercial real estate and cnsumer credit. The intentin is t incrprate this prgram int the previusly annunced Term Asset-Backed Securities Facility (TALF). Prviding Investrs Greater Cnfidence t Purchase Legacy Assets:As with securitizatins backed by new riginatins f cnsumer and business credit already included in the TALF, we expect that the prvisin f leverage thrugh this prgram will give investrs greater cnfidence t purchase these assets, thus increasing market liquidity. Funding Purchase f Legacy Securities: Thrugh this new prgram, nnrecurse lans will be made available t investrs t fund purchases f legacy securitizatin assets. Eligible assets are expected t include certain nn-agency residential mrtgage backed securities (RMBS) that were riginally rated AAA and utstanding cmmercial mrtgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA. Wrking with Market Participants: Brrwers will need t meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness f the assets prvided as cllateral. Lending rates, minimum lan sizes, and lan duratins have nt been determined. These and ther terms f the prgrams will be infrmed by discussins with market participants. Hwever, the Federal Reserve is wrking t ensure that the duratin f these lans takes int accunt the duratin f the underlying assets. 2. Partnering Side-by-Side with Private Investrs in Legacy Securities Investment Funds: Treasury will make c-investment/leverage available t partner with private capital prviders t immediately supprt the market fr legacy mrtgage- and asset-backed securities riginated prir t 2009 with a rating f AAA at riginatin. Side-by-Side Investment with Qualified Fund Managers: Treasury will apprve up t five asset managers with a demnstrated track recrd f purchasing legacy assets thugh we may cnsider adding mre depending n the quality f applicatins received. Managers whse prpsals have been apprved will have a perid f time t raise private capital t target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Prgram. Treasury funds will be invested ne-fr-ne n a fully side-by-side basis with these investrs. Offer f Senir Debt t Leverage Mre Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, t subscribe fr senir debt fr the Public- Private Investment Fund frm the Treasury Department in the amunt f 50% f ttal equity capital f the fund. The Treasury Department will cnsider requests fr senir debt fr the fund in the amunt f 100% f its ttal equity capital subject t further restrictins.

5 Sample Investment Under the Legacy Securities Prgram Step 1: Treasury will launch the applicatin prcess fr managers interested in the Legacy Securities Prgram. Step 2: A fund manager submits a prpsal and is pre-qualified t raise private capital t participate in jint investment prgrams with Treasury. Step 3: The Gvernment agrees t prvide a ne-fr-ne match fr every dllar f private capital that the fund manager raises and t prvide fund-level leverage fr the prpsed Public-Private Investment Fund. Step 4: The fund manager cmmences the sales prcess fr the investment fund and is able t raise $100 f private capital fr the fund. Treasury prvides $100 equity c-investment n a side-by-side basis with private capital and will prvide a $100 lan t the Public-Private Investment Fund. Treasury will als cnsider requests frm the fund manager fr an additinal lan f up t $100 t the fund. Step 5: As a result, the fund manager has $300 (r, in sme cases, up t $400) in ttal capital and cmmences a purchase prgram fr targeted securities. Step 6: The fund manager has full discretin in investment decisins, althugh it will predminately fllw a lng-term buy-and-hld strategy. The Public-Private Investment Fund, if the fund manager s determines, wuld als be eligible t take advantage f the expanded TALF prgram fr legacy securities when it is launched.