Category — PPIP

In his Quarterly Report to Congress submitted on April 21, 2009, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) made recommendations to address what the SIGTARP identified as “inherent vulnerabilities” in the Department of the Treasury’s Public-Private Investment Program (PPIP).

Of particular concern to the SIGTARP is the ability of Public-Private Investment Funds (PPIFs), formed pursuant to the Legacy Securities Program, to purchase legacy residential mortgaged-backed securities (RMBS) through the Term Asset-Backed Securities Loan Facility (TALF). The Treasury has previously announce that it will co-invest up to 50 percent of the equity in such PPIFs, and that, in addition, such PPIFs will be eligible to borrow from the Treasury an amount equal to up to 50 percent of the PPIF’s total equity.

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In his Quarterly Report to Congress submitted on April 21, 2009, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) made a series of new recommendations to address what the SIGTARP identified as certain “inherent vulnerabilities” in the Department of the Treasury’s Public-Private Investment Program (PPIP).

The report indicates that certain aspects of PPIP make it inherently vulnerable to fraud, waste and abuse. Of specific concern to the SIGTARP are issues related to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering. Accordingly, the SIGTARP made a series of recommendations to address its concerns.

With respect to conflicts of interest, the SIGTARP recommends that the Department of the Treasury impose strict conflict of interest rules on fund managers of Private-Public Investment Funds (PPIFs) formed pursuant to PPIP. The SIGTARP further recommends that these rules apply to fund managers across all PPIP programs, and that the rules specifically address whether and to what extent the managers can (i) invest PPIF funds in legacy assets that they hold or manage on behalf of themselves or their clients, or (ii) conduct PPIF transactions with entities in which they have invested on behalf of themselves or others.

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The Legacy Securities Public-Private Investment Program (PPIP) announced by the Department of the Treasury in March 2009 calls for the formation of Public-Private Investment Funds (PPIFs), in which Treasury and private investors will “co-invest” funds to purchase certain legacy securities. Treasury’s investment in the PPIFs will use funds from the Troubled Assets Recovery Program (TARP). The PPIFs related to Legacy Securities will be managed by asset managers who have been selected by Treasury as eligible and who raise sufficient equity to satisfy Treasury’s requirements.

Pursuant to the Emergency Economic Stabilization and Recovery Act of 2008 (EESA), recipients of TARP funds may be subject to certain executive compensation restrictions. As such, there has been much speculation as to whether the EESA compensation restrictions would apply to asset managers of Legacy Securities PPIFs.

On April 21, 2009, Treasury issued an updated “Frequently Asked Questions” circular announcing that the executive compensation restrictions will not apply to asset managers of, or private investors in, PPIFs, provided the PPIFs are structured such that the asset managers themselves and their employees are not employees of, or controlling investors in, the PPIFs, and other investors are purely passive.

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In an effort to determine the level of investor interest in the Legacy Loans Program (LLP), Federal Deposit Insurance Corporation (FDIC) is asking investors to respond to an online survey published on FDIC’s Web site. Access to the survey may be obtained here. FDIC has indicated that responses to the survey will remain confidential.

FDIC intends to begin contacting interested investors to determine their eligibility to participate in the LLP as soon as a definitive structure for the program has been announced. Although investor eligibility requirements have not yet been determined, FDIC has stated that investors must demonstrate their ability to manage purchased assets with an eye to maximizing their value and minimizing risk to FDIC, as the guarantor of debt used to purchase the assets, and the U.S. Treasury, as an equity participant in the purchasing public-private investment fund (PPIF).

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The Public-Private Investment Program (PPIP) is the new program established jointly by the U.S. Treasury Department, the U.S. Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to provide financing for the purchase by private investors of (i) whole loans and other assets held by depository institutions and (ii) certain residential and commercial mortgage-backed securities issued before 2009 that were originally rated “AAA.” The PPIP is comprised of two parts: a Legacy Loan Program and a Legacy Securities Program. This alert discusses both of these programs, as well as certain tax consequences in connection with the Legacy Loan Program.

The Treasury has proposed to make available to the PPIP $75 to $100 billion from Troubled Asset Relief Program (TARP) funds, with the goal of generating between $500 billion to $1 trillion in purchases of these legacy assets. Although the Treasury and the FDIC recognize the urgency of implementing the PPIP, some time will be required for the FDIC to propose guidelines and/or regulations, including a period for public comment, before sales of loans and securities may begin.

Read the full text of the alert here.