An estimated $2 trillion of the toxic securities are held by U.S. banks, Treasury officials said. They stressed that the market for mortgage-backed securities assets has improved since March and that banks have shown the ability to raise capital again, lessening the need for large programs.
In a joint statement, Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairwoman Sheila Bair said the programs would "initially be modest in size" but could be expanded quickly if financial conditions worsen.
Scott Talbott, senior vice president of the Financial Services Roundtable in Washington, said the financial industry still sees the toxic assets program as an "important program to keep in the arsenal" because the banking system and the economy have faced so much uncertainty.
One of the complications in launching the Public Private Investment Program was a lengthy application process for private fund managers that would purchase the assets. More than 100 firms applied to be part of the program, Treasury officials said. Among the nine selected were BlackRock Inc., Wellington Management Co. and Invesco Ltd.
Potential managers also had to agree to conflict-of-interest rules and ethics guidelines. Among them were provisions that would prevent them from purchasing assets from any affiliates and require them to have independent compliance units that would report back to the Treasury Department.
Fund managers will be required to invest at least $20 million of their own money, and each manager will have up to 12 weeks to raise at least $500 million from private investors. Treasury officials expect the managers to raise as much as $10 billion altogether.
That money would be joined with federal funds to purchase the securities. The Treasury will match up to $10 billion and then loan the funds a total of up to $20 billion.
Treasury officials designed the partnerships so that fund managers would share the risks of losing money on the purchases if they pay too much for them, and the profits if they strike a fair price and the value of the underlying mortgages improves over time.
Finding a fair price for the assets has been the major stumbling block in government efforts to purchase them. The $700-billion Troubled Asset Relief Program launched last fall was originally designed for the government to buy the assets directly. But Bush administration officials abandoned that plan partly because it was difficult to determine a fair price for the complex securities.
The prices that fund managers will pay for the assets will not be disclosed, a senior Treasury official said Wednesday.
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jim.puzzanghera@latimes.com
ralph.vartabedian@latimes.com
