"PPImP My SPV"

Treasury Statement on Public-Private Investment Program (Text)

I read the full text on Bloomberg. "... private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns." -- But since the taxpayer is providing half the equity in each program, plus "non-recourse loans" in the "legacy securities" program, we obviously share the downside, too, much more downside.

In the so-called "legacy loan program" the FDIC's guaranty is collateralized by the (toxic) assets, but is are these also non-recourse? We, the taxpayer, already share in between 35% and 90% of the profits, depending on whether you use the corporate tax rate (35%) or the Barney Frank Special 90%, legislated 'in arrears' (so to speak).

Beyond that, it's hard to see an integrated or cohesive plan. The central problem is homeowners who can't afford their mortgages. We have several confused and/or confusing programs for that. Taxpayer "capital" has already been indiscriminantly sunk into banks. And now we have these intermediate "loan" & "securities" programs, along with all those other half-baked and less than half-executed programs (TALF, TARP, CP, MMkt,etc.).

If you fix the front-end problem, then do you need all these intermediate (intermediary) programs too? Probably not, as it's just one set of cashflows going thru the system, haphazardly propped up at various stages by this proliferation of federal programs, with much taxpayer "equity" injected at various points along the way. Hard to make sense of it.

Since there's so much convexity in the underlying mortgages & RMBS, won't these investors or funds need some swaps to manage rate risk? But what ISDA lawyer wants to dive into this morass of FDIC guaranteed loans, "non-recourse" Treasury loans with Treasury as 50% equity partner, all of which is probably subject to second-guessing and/or confiscatory taxes if successful? What is the governing law by which these 'brave new' PPIFs are organized: are they corporations, '40 Act companies, SPVs, LLCs, or is it just more ad-hoc Treasury decrees? In other words, who has regulatory jurisdiction and responsibility for bankruptcy or liquidation?

JRB

3/23/09