Public–Private Investment Program for Legacy Assets
This term referred to: These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.
Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of the complex securitization instruments, some of whose risks were not fully understood.
The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales.
The lack of clarity about the value of these legacy assets also made it difficult for some financial institutions to raise new private capital on their own.
It is widely held that because of the stringent mandates from the U.S. government, financial institutions were forced to lend cheap money to unqualified borrowers increasing the risk on their books.
On April 3, 2012, PPIP manager Invesco announced it had sold all remaining securities in its portfolio and was in the process of winding up the fund.
According to Treasury, the aim of PPIP was to "restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit."
Treasury, the PPIP managers, and the private investors share PPIF profits and losses on a pro rata basis based on their limited partnership interests.
The portfolio value was also affected by Invesco's sale of its remaining securities in March 2012, discussed in greater detail in this section.
The Legacy Loans Program will facilitate the creation of individual Public–Private Investment Funds which will purchase asset pools on a discrete basis.
The Treasury anticipates that the resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital.
The lending program will address the broken markets for securities tied to residential and commercial real estate and consumer credit.
Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public–Private Investment Program.
The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.
Economist and Nobel Prize winner Paul Krugman has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors.
If there are overbidding incentives, they depend on the amount of leverage, the interest rates and guarantee fees charged by the Federal Reserve or the FDIC, respectively, and the volatility of the toxic assets.
Federal Reserve of New York president William Dudley stated on June 4, 2009 that "there's a huge administrative hurdle" to implementing the program.
