By EDMUND L. ANDREWS
Published: October 4, 2009
http://www.nytimes.com/2009/10/05/business/economy/05tarp.html?hpw
The Treasury Department said on Sunday that its scaled-down program to help banks unload their troubled mortgages and mortgage securities would begin operating at full strength by the end of this month, more than a year after Congress authorized $700 billion for that purpose.
Treasury officials said that five out of the nine money-management firms it selected to buy up unwanted mortgage-backed securities had raised the minimum amount of money from private investors — $500 million each — to qualify for matching investments and loans from the federal government.
At issue is the Public-Private Investment Program, the Obama administration’s attempt to carry out what the Bush administration had originally told Congress would be the main purpose of the $700 billion rescue program for financial institutions.
The initial idea was to have the government clear out the banking system’s pipelines of bad mortgages and nearly unsellable mortgage-backed securities. The Treasury secretary under President George W. Bush, Henry M. Paulson Jr., argued that the government could revive trading in the mortgage market, restore investor confidence and let banks remove troubled assets from their books.
But Mr. Paulson reversed course almost as soon as Congress approved the plan, deciding instead to have the government inject money directly into banks by buying up special nonvoting shares of their preferred stock. The revised plan, known as the Troubled Asset Relief Program, was eventually used to prop up banks, bail out companies like the American International Group, subsidize loan modifications for troubled homeowners and rescue the automobile industry.
The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.
The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.
In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money.
