The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Public-Private Investment Program

  • From Vol. 2 No.32 (Aug. 12, 2009)

    Does the FDIC’s Restructured Legacy Loans Program Improve or Diminish the Case for Participation by Hedge Funds?

    On July 31, 2009, the Federal Deposit Insurance Corporation (FDIC) issued a press release announcing the first test of the funding mechanism for its Legacy Loans Program (LLP), part of the Public-Private Investment Program (PPIP).  Specifically, the FDIC announced that it has created a limited liability company (LLC) to receive troubled assets, and that by the end of this summer it plans to have the receiver of a defunct bank transfer loans and other assets into the LLC “on a servicing released basis . . . in exchange for an ownership interest in the LLC.”  On June 3, 2009, the FDIC had put the earlier incarnation of the LLP on indefinite hold.  See “Treasury, Fed and FDIC Officials Discuss Suspension of Legacy Loans Program, Status of Legacy Securities Program and Future of the TALF at SIFMA and PREA’s Public-Private Investment Program Summit,” The Hedge Fund Law Report, Vol. 2, No. 23 (Jun. 10, 2009).  The June 3 announcement cancelled a previously planned pilot sale of assets.  In its more recent press release, the FDIC said that it would instead “test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer,” drawing on the experience of the Resolution Trust Corporation (RTC) in the late 1980s and early 1990s.  The RTC used a number of distinct models of “equity partnership,” but in essence there is one major difference between the goals of the RTC and the LLP: the RTC was charged with distributing the assets of closed institutions, whereas the goal of the LLP is to reinforce the solvency of open banks and jumpstart their lending activities.  We examine the restructured LLP from the hedge fund perspective, and in the course of our examination discuss: the RTC precedent; the mechanics of the test program; the background of the LLP; valuation issues; concerns with participation (including tax and “headline risk” concerns); cash and leverage options; and the policy behind the PPIP.

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    Treasury, Fed and FDIC Officials Discuss Suspension of Legacy Loans Program, Status of Legacy Securities Program and Future of the TALF at SIFMA and PREA’s Public-Private Investment Program Summit

    On June 4, 2009, the Securities Industry and Financial Markets Association (SIFMA) and the Pension Real Estate Association (PREA) hosted the Public-Private Investment Program (PPIP) Summit, which featured key speakers from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).  The day-long event highlighted some of the key changes to the PPIP, including the recent FDIC announcement that the program for loans was being put on indefinite hold.  In addition, speakers addressed the prospects for the Term Asset-Backed Securities Loan Facility (TALF), and the potential evolution of the securitization market in light of the credit crisis.  We discuss the FDIC’s decision to put the Legacy Loans Program on hold, why banks have been reluctant to sell troubled assets, the structure of and prospects for participation in the Legacy Securities Program and the TALF and concerns with the government as a partner.

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  • From Vol. 2 No.13 (Apr. 2, 2009)

    Should Hedge Funds Participate in the Public-Private Investment Program?

    On March 23, 2009, the Treasury Department announced the Public-Private Investment Program (PPIP), a collaborative initiative among the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), on the one hand, and private investors, on the other hand, to create $500 billion to $1 trillion in buying power for the purchase from financial institutions of “legacy” (formerly known as “toxic”) loans and securities.  Loans eligible for purchase likely will include primarily residential and commercial mortgages and leveraged loans used to fund buyouts, and eligible securities are likely to include securities backed by eligible loans and certain consumer loans.  The goals of the PIPP include (1) creating a market for currently illiquid assets, thus enabling financial institutions to value and sell those assets, which in turn will enable the institutions to make new loans, raise new capital and repay TARP loans; and (2) reopening the securitization markets, which, at least prior to the credit crisis, generally expanded (some would argue over-expanded) the availability of consumer credit and reduced its cost.  Many of the details of the PPIP remain to be provided.  In the meantime, prior to the provision by the Treasury, Federal Reserve Board or FDIC of further guidance and clarification, hedge and other private fund managers are evaluating the advisability of participation based on the announced parameters of the PPIP.  In particular, hedge fund managers are analyzing the following issues, among others:

     

    1. The scope of the FDIC’s oversight of various aspects of the PPIP, and the role of the Treasury as an equity co-investor and, in the case of the Legacy Securities Program, a lender.
    2. With respect to the Legacy Loans Program, the design of the auctions in which assets will be sold, and the timing of the FDIC’s leverage determinations (i.e., the extent to which the FDIC can, as a practical matter, provide clarity with respect to the amount of leverage it can offer prior to commencement of an auction).
    3. Any limits that may be imposed on hedge fund manager compensation as a result of participation.
    4. How participation may be structured, i.e., whether current funds can invest or whether new dedicated funds have to be organized.
    5. Tax issues, including the structures that will be permitted or required for PPIFs, the ability of tax-exempt or non-U.S. investors to invest in PPIFs via offshore feeder funds (likely structured as non-U.S. corporations) and the characterization of income from PPIFs as ordinary income or capital gain.
    6. Adverse selection issues, i.e., whether banks will only seek to sell their worst assets under the program (and if so whether appropriate pricing can mitigate the gravity of this concern).

     

    Our article addresses each of these issues in detail.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    United States Treasury Department Announces Public-Private Investment Program – In Effect, Becomes the World’s Largest Prime Broker

    On March 23, 2009, the Treasury Department announced a new Public-Private Investment Program (PPIP), a collaborative initiative among the Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and private investors to create $500 billion to $1 trillion in buying power for the purchase from financial institutions of “legacy” or “toxic” assets.  The idea of the PIPP is that purchasing such assets – primarily real-estate and corporate loans and securities backed by such loans – from financial institutions will fortify the institutions’ balance sheets, thus enabling them to raise new capital and make new loans, and thereby re-opening the spigots of credit in the U.S. economy.  The PPIP seeks to address the challenge of valuation of legacy assets largely by outsourcing valuation to private investment firms and allocating some of the risk of distressed asset purchases to such firms.  Broadly, under the terms of the PPIP, the government will act as a lender to private investors and, to a lesser degree, as a co-investor.  In theory, private investors will determine how best to allocate government capital, and will enjoy some of any upside, with limited downside.  In this sense, the government appears to have become, in effect, the world’s largest prime broker.  We explain the details of the PPIP in a long-form analysis.

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