Posted on July 2, 2009 by Louis F. Strawn

The Treasury's Public-Private Investment Programs: So Where Are the Deals?

We all recall the Treasury Department's announcement back in April regarding the creation of the Legacy Loan and Legacy Securities Programs under the general rubric of the "Public-Private Investment Programs" (PPIP).

The Treasury's message had two very specific announcements with a set of frequently asked questions regarding efforts to "discover a market" by implementing these two programs designed to purchase either toxic whole loan assets or securities (in the form of RMBS and CMBS).

So far at least, activity under these two programs has been underwhelming.

The original programs indicated that the Federal Deposit Insurance Corporation (FDIC), as primary bank regulator, would expect to receive business plans from regulated banks which would articulate a plan to dispose of the "toxic assets" through the PPIFs.

Within a very short number of weeks after the announcement of the Legacy Loan and Legacy Securities Programs, the Board of Governors at the Federal Reserve issued the results of the so-called "stress test" (the supervisory capital assessment program; overview of results, issued May 7, 2009). Nineteen bank-holding companies were examined under a stress set of criteria and were given until year-end 2010 to transform their capital base so that "tier 1 common capital" would meet or exceed 4% of assets, on a risk adjusted capital adequacy level as described in the report.

The results went on to disclose that even the very large bank-holding companies had started to manage to these "risk adjusted" goals and were able to make significant headway in getting to the guidelines of adjusted capital between the end of the year 2008 and first-quarter results for 2009. 
In effect by mid-May, the overall market reaction to the stress test publication was that the banks were not going to be required to "fire sale" toxic assets, but "had time" to let markets recover.

Many have wondered if that is not a substantial reason for the lack of sellers being willing to take significant discounts on their toxic assets in the PPIF programs.  After all, their targets need to only be met by year-end 2010 and the banks are well on their way to meeting them.

Does anyone out there think that the Legacy Loan and Legacy Securities Programs will begin to see some transactional action in the next six months?  Please share your comments.
 

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Posted on June 2, 2009 by Louis F. Strawn

Release of the "Stress Test": Will it Relieve the Stress?

We've now had a few weeks to review and react to the release by the Board of Governors of the Federal Reserve Systems stress test. See The Supervisory Capital Assessment Program: Overview of Results, dated May 7, 2009.

The Fed goes out of its way to state what the stress test IS, and what it is NOT. Specifically, it is NOT a prediction about the future downward movement in the economy, but simply a measurement device that the Fed will use to determine how much of a buffer certain selected large US bank-holding companies (BHCs) would need under a significantly negative set of economic assumptions about the future. The idea is to ensure that even under a relatively dark set of assumptions, major American banks will have the capital to survive.

To that end, a detailed paper on the Supervisory Capital Assessment Program ("SCAP") was released on April 24. The "SCAP buffer" requires that the BHC's attain by the end of 2010, Tier 1 capital of at least 6% of assets and Tier 1 common capital at least equal to 4% of total assets. Of the 19 BHC's in the study, 9 of them already have capital sufficient to meet this requirement. Of the remaining 11 that must add Tier 1 capital, the vast majority of the 185 billion will be added to Tier 1 common capital to attain the 4% requirement.

The Fed makes a point of noting that these hurdles are not designed to be an ongoing regulatory requirement imposed by either the Federal Reserve System or the FDIC. The most important point is that the Fed is acting decisively and quickly in an effort to have major banking institutions design, within the next 30 days, programs to reach the results called for in the stress test mentioned above by December 31, 2010.

Interestingly, the Treasury has not only put in place requirements for shedding certain assets (home mortgages, second tier commercial mortgages and both commercial and residential mortgage back securities (RMBS and CMBS)). Further, the Treasury through offering to the TARP program (principally TALF loans and the Legacy Loan Program and Legacy Securities Program) is not only setting out the requirements but is also providing the tools, for accomplishing the tasks placed before BHCs over the next 2 years.

In effect, we have a road map for the way out. The FDIC, the Fed and the Treasury have acted decisively and in close coordination in an effort to get capital flowing at what may turn out to be surprisingly increased levels toward the end of this year.

Will it work? Stay tuned.
 

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