Public Private Investment Program and its Regulatory Measures

In a statement set forth on May 20th, 2009 before the Senate Banking Committee, Timothy F. Geithner, U.S. Secretary of the Treasury, discusses the rehabilitative financial programs and regulatory measures proposed by Congress in response to the nation’s financial upheaval and economic uncertainty.  These initiatives are introduced as a follow-up to the Emergency Economic Stabilization Act (EESA), passed by Congress in October of 2008 with the specific goal of stabilizing the nation’s financial system and preventing catastrophic collapse.  One such initiative designed to assist in the sale of devalued loans and securities is the Public Private Investment Program (PPIP).

The PPIP is designed as part of an overall strategy to resolve the crisis as quickly as possible with the least cost to the taxpayer. As asset prices have been pushed to extremely low levels, obtaining private financing on reasonable terms to purchase these assets has become increasingly difficult, further reducing the ability of financial institutions to provide new credit. The resulting uncertainty about the value of these assets has also constrained the ability of financial institutions to raise private capital.  The PPIP is intended to restart the market for those assets lost in the course of deleveraging, while restoring bank balance sheets as these devalued loans and securities are sold.  Using $75 to $100 billion in capital from EESA and capital from private investors – as well as funding enabled by the Federal Reserve and FDIC – PPIP will generate $500 billion in purchasing power to buy legacy assets, with the potential to expand to $1 trillion over time. By providing a market for these assets, PPIP will help improve asset values, increase lending capacity for banks, and reduce uncertainty about the scale of losses on bank balance sheets – making it easier for banks to raise private capital and replace the capital investments made by Treasury.

PPIP will follow three basic principles in its strategy:

1. Making the most of taxpayer dollars:  Maximize utility of taxpayer resources under the Emergency Economic Stabilization Act (EESA) by partnering with the FDIC, the Federal Reserve, and private sector investors
2. Sharking risk with the private sector:  Ensure that private sector participants invest alongside the government, with the private sector investors standing to lose money in a downside scenario and the taxpayer sharing in profitable returns
3. Taking advantage of private sector competition to set prices for currently illiquid assets:  Use competing private sector investors to engage in price discovery, reducing the likelihood that the government will overpay for these assets

The PPIP will have two major components – securities and loans. The Legacy Securities program will target commercial mortgage-backed securities and residential mortgage-backed securities, and the Legacy Loans Program is designed to attract private capital to purchase eligible legacy loans and other assets from participating banks through the availability of FDIC debt guarantees and Treasury equity co-investments.  The terms of funding provided for both parts of the PPIP, including fees, will be set in a way that is designed to limit the risks faced by U.C. taxpayers while still meeting the objective of generating new demand for legacy assets.  In addition, those participating in the program will be subject to a significant degree of oversight to ensure that their actions are consistent with the objectives of the program. The U.S. Secretary of the Treasury expects the PPIP to begin operating over the next six weeks.

In response to the heightened systemic risk experienced by the securities markets due to rapid growth of the largest financial institutions, a more conservative regulatory regime is also being proposed to govern the sale of loans and securities. In addition to addressing the potential insolvency of individual financial institutions, the new regulatory measures are designed to ensure the stability and consistency of the system itself. The new comprehensive reforms will offer the following improvements:

• Meaningful & simply stated disclosures that actual consumers and investors can understand
• Clear , reasonable, and appropriate financial choices offered to consumer
• Clear accountability, authority, and resources for protecting consumers and investors
• Global consistency with U.S. standards for financial regulation
• Material improvements to prudential supervision, tax compliance, and restrictions on money laundering in weakly-regulated jurisdictions
• Resolution authority that would grant additional tools to avoid the disorderly liquidation of the largest (systemically significant) financial institutions

Geithner concludes his discussion by stating that the central obligation of the U.S. Treasury is to ensure that the economy is able to recover as quickly as possible. To achieve this recovery, the Treasury commits to restore 1) a stable financial system that is able to provide the credit necessary for economic recovery, 2) the strict observance of comprehensive regulatory reforms that deter fraud and abuse while rewarding innovation and performance.