Treasury Attempts to Restart Legacy Securities Market

March 23, 2009 ( - The U.S. Treasury Department has released details on an investment program designed to encourage the purchase of legacy assets.

In a fact sheet, the Treasury said its Public-Private Investment Program for Legacy Assets will have two parts to address both real estate loans held directly on the books of banks (legacy loans) and securities backed by loan portfolios (legacy securities). Legacy securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

The goal of Legacy Securities Program “is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit,” the Treasury said. The department anticipates that the resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, and give investors greater confidence in purchasing the assets.

Through the new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA, the fact sheet said.

Treasury will launch the application process for managers interested in the Legacy Securities Program, and will approve up to five asset managers with a demonstrated track record of purchasing legacy assets. Selected fund managers will submit proposals and be pre-qualified to raise private capital to participate in joint investment programs with Treasury.

Under the program, the government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.

As an example, the treasury says that if the fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund, Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund. As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.

According to the fact sheet, the fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy.

The fact sheet describing the Legacy Securities Program as well as the Legacy Loans Program is here .

A white paper and FAQs can be found at .