Saturday, March 28, 2009

week in review:take 2

Weekly Wrap The S&P 500 continued its rally off its March 6 lows, surging 6.2% on the week, led by gains in financials as Treasury Secretary Geithner unveiled his plan to purchase bad assets from banks and housing data came in better-than-expected.
The bulk of the gains were made on Monday with the major indices gaining around 6% and financials spiking 17.7% as the Treasury Department released details regarding its plan to remove troubled assets from the balance sheets of banks. The Treasury plans to create a series of public-private investment funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies. In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.

Also giving the market a boost on Monday was news that existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million. A substantial portion of the sales were from first time homebuyers and distressed properties.

Later in the week, the Census Bureau released upside new home sales reports. February new home sales increased 4.7% month-over-month at an annualized rate of 337,000, topping the consensus estimate that called for a 2.9% decline. Though the result was better-than-expected, it is important to note the increase is at 4.7% +-18.3% (range of -13.6% to +22.7% ), which the Census Bureau notes makes it not statistically significant because it is not clear if the sales rose or fell. Meanwhile, sales are still down 41.1% +-7.9% from the previous year and are at their second lowest rate on records dating back to 1963. Still, traders took the data as an encouraging sign of a potential bottoming in new home sales.

While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.

In other economic data, February durable goods orders increased 3.4%, marking the first time in six months that orders increased. Excluding transportation, orders increased 3.9%. Economists expected respective declines of 2.5% and 2.0%, respectively. Separately, final fourth quarter GDP reading showed a 6.3% annualized rate of contraction, a slight decrease from the preliminary -6.2%, but better then the 6.6% decline that was expected.

Though not normally stock market-moving events, Treasury auctions were widely watched after a U.K. offering failed on Wednesday and a U.S. five year offering had disappointing demand, resulting in a sharp drop in Treasuries and a brief pullback in the stock market. But a 7-year auction on Thursday had solid demand, giving the stock market a boost and easing concerns that the U.S. cost of borrowing will increase in the face of record borrowing. On a related note, there was some speculation the movement in Treasuries had to do with China, which this week said it wants an international currency instead of using U.S. dollars. In addition, the Federal Reserve said began its $300 bln long-term Treasury purchase program on Wednesday.

As has been the case for the last several months, Capitol Hill was in focus throughout the week. Fed Chairman Bernanke and Treasury Secretary Geithner testified before the House Financial Services Committee hearing regarding the rescue of AIG (AIG ). Bernanke and Geithner expressed their own frustrations and opinions regarding executive compensation, efforts to protect the economy, and risk-taking constraints. Separately, Treasury Secretary Geithner testified before the House Financial Services Committee that an overhaul of financial regulation is needed. The changes would aim to limit risk in order to prevent future financial crises.

World governments are likely to garner attention next week, as the G-20 meets April 2. Tighter regulation over the financial markets is expected to be an area of focus.

In corporate news, Best Buy (BBY) surged 17.8% on the week after posting better-than-expected fourth quarter earnings of $1.61, $0.21 better than the consensus. The retailer also provided full year guidance that was well above expectations. Accenture (ACN) lowered its outlook for the full year, sending its stock down 8.4% for the week.

In the end, all ten sectors posted solid gains for the week. Financials advanced 12.2% , industrials gained 10.5% and consumer discretionary advanced 8.8%. Defensive sectors underperformed on a relative basis, with utilities up 1.5%.

The S&P 500 is now up 22.4% from its March 6 low.

Index Started Week Ended Week Change % Change YTD %
DJIA 7278.38 7776.18 497.80 6.8 -11.4
Nasdaq 1457.27 1545.20 87.93 6.0 -2.0
S&P 500 768.54 815.94 47.40 6.2 -9.7
Russell 2000 400.11 429.00 28.89 7.2 -14.1

Weekly Market Update (3/27/09)‏

Payden & Rygel


Existing home sales rose 5.1% in February to an annualized rate of 4.72 million as declining home prices and falling interest rates began to lure would-be home buyers back into the market. more...

US Treasuries traded in a narrow range this week with a tendency towards higher yields. The 30-year bond was the exception by rallying 10 basis points (bps). more...
Large-Cap Equities
The stock market rallied for the third straight week spurred by details of the Treasury's $1 trillion public-private plan to buy troubled bank assets on Monday. more...

Corporate Bonds
Investment grade primary issuance utilized the recent positive sentiment in the equity markets to bring out issuers looking to tap into the market before earnings season commences. more...

Mortgage-Backed Securities
The residential and commercial mortgage markets responded favorably to the Obama Administration’s long awaited plan to address the slew of legacy real estate assets clogging the banking system. more...

Municipal Bonds
Dominating market action this week was California’s gigantic new general obligation (GO) bond issue. The state set out to borrow $4 billion, but due to strong demand from retail investors in higher tax brackets seeing yields equivalent to 8-9% taxable bonds, the deal was upsized to $6.54 billion. more...

The high yield market has maintained the momentum of the past two weeks and continued to rally. The Merrill Lynch High Yield Constrained Index is up 6.3% since March 6, 2009 and has been following directionally the 20% rally in the S&P 500 index over the comparable period. more...

Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were auto and parts (+4.9%) and food and beverages (+4.4%). more...
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.7% this week, while the Russian stock index RTS went up by +3.5%. more...

Global Bonds and Currencies
Major non-US government bond markets were generally weaker over the past week, weighed down by a combination of further stock market gains, a more upbeat tone to some economic forecasts and supply concerns. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. Risk markets continued the positive tone of recent weeks, with investor sentiment buoyed by the better-than-expected US economic data. more...

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Market Reflections 3/27/2009

A slip in personal income tripped a run of profit taking in the stock market where the S&P 500 fell 2% to 815.93. But there was also good news in the session, at least out of the UK where reports said Barclays would successfully pass a stress test, a reminder from earlier in the month when both Citigroup and Bank of America said they were running at a profit.

Profit taking hit oil as did supply-cut news from OPEC members Ecuador and Venezuela. Supplies are tightening right as inventories are peaking in what some are calling a "tie" between supply and demand. May WTI ended just above $52. Gold fell back $15 to $925.

Much of gold's dip was due to strength in the dollar which jumped more than 2 cents to end at $1.3290 against the euro. The euro was hit by profit taking and by weak economic data from Europe. Treasuries were little changed but the Fed did buy $7.4 billion of mid-maturity issues, part of its effort to lower mortgage rates.

Friday, March 27, 2009

Market Reflections 3/26/2009

News from Linux provider Red Hat best embodies Thursday's upbeat session. Markets moved on a Reuters report that the company thinks the worst has passed, comments repeated by a run of others in the session including retailers Best Buy and Citi Trends. Economic data in the session was not upbeat, including another jump in continuing unemployment claims and a final fourth-quarter GDP headline of -6.3 percent.

Stocks ended at their highs, up 2.3% at 832.65 for the S&P 500 but in another session of light volume. Treasuries were especially strong in the session, highlighted by heavy demand for $24 billion in 7-year notes in an auction that helped renew confidence in the ability of the Treasury to attract buyers. The Federal Reserve is now buying Treasuries in an effort announced last week to lower mortgage rates. The 10-year yield fell 4 basis points to 2.74 percent. The dollar regained about half of yesterday's losses, up 3/4 of a cent against the euro to $1.3522.

Gold posted important gains in the session, up about $5 to $940 despite the gain in the stock market and despite the gain in the dollar. There's plenty of talk among gold traders that Chinese unease with their dollar holdings point to future weakness for the dollar and future gains for gold. Oil also ended firmer, up more than $1 to just over $54.

Thursday, March 26, 2009

US data releases

The US data releases continued to be surprisingly strong.
Both durable goods and sales of new homes unexpectedly rose in February according to yesterday's reports. Durable goods orders jumped 3.4% in February, after dropping a revised 7.3% in January.
This increase was the largest in more than a year, and the first positive move in seven months.
The other big piece of data released by the Commerce Department showed New home sales increased 4.7% vs. the January sales.
These two positive numbers eased fears in the equity markets, and encouraged investors to take more risks. This is why positive economic data releases in the US cause a sell off in the US$ (the reversal of the trend we were seeing earlier this year).
Does anyone find it odd that all of the data we are seeing this week are surprisingly strong, while the revisions to the prior month's data show even bigger drops? I'm not accusing the government of massaging the numbers (wink wink) but it just seems odd.
Today we will see the GDP numbers from 4th quarter of 2008. The economists are predicting a drop of 6.6% during the last quarter, but the trend with data releases this week would suggest the number will come a bit stronger. We will also see the weekly jobless claims which are expected to show another 650k US citizens were out of a job last week. This would be the eighth consecutive week of a 600k+ number for jobless claims. The jobs numbers will have to start improving if the US is going to really turn things around.

Market Reflections 3/25/2009

Treasury Geithner didn't help the dollar which fell more than 1-1/2 cents to $1.3600 against the euro. Speaking in New York, Geithner reportedly said he is "open" to a proposal, voiced earlier this week by China, to increase the use of the IMF's special drawing rights, a system that would substitute non-dollar currencies or commodities for dollars. Geithner later affirmed the dollar's role as the world's reserve currency, saying it won't be changing anytime soon. President Obama voiced opposition on Tuesday against a global currency.

Stocks were little changed but not Treasuries where the surge of supply is beginning to bend the rafters. Demand was very thin for the day's gigantic $34 billion 5-year auction. The Treasury auctions $24 billion of 7-year notes on tomorrow.

A big inventory draw at the key delivery point of Cushing, Oklahoma will probably help keep oil above $50 through the rest of the week. May WTI ended at $52.86. Talk is building that oil's range, stuck for months at $35 to $50, has shifted to $50 to $60. News of strong inflows into gold ETFs is helping to keep gold firm, ending at $936.90.

Wednesday, March 25, 2009

Interesting tidbits

Feldstein: Recession likely to linger into next year

There is a good chance the U.S. will need to implement a second economic stimulus as the recession persists beyond this year, said economist Martin Feldstein, a member of President Barack Obama's Economic Recovery Advisory Board. The Harvard University professor said he does not know when the recession will end, but "the forecasts that it'll end later this year, I think, are too optimistic." Reuters.
No argument here on that.

S&P downgrades Berkshire Hathaway's ratings outlook

Berkshire Hathaway's ratings outlook was lowered from stable to negative by Standard & Poor's. The rating agency attributed the change to a drop in capital for Berkshire's insurance operations that came as a result of the stock market's decline. The Wall Street Journal.
Fitch was ahead on this one on 3/12.

Unexpected inflation spike hits U.K. economy
In a development that economists did not anticipate, inflation in Britain rose to 3.2% in February, driven primarily by food prices. Experts had expected a 2.6% increase for the consumer-price index.

The U.S. Treasury's plan for removing troubled assets from the balance sheets of banks will likely force those institutions, including Bank of America, Citigroup and Wells Fargo, to take substantial write-downs, analysts and executives said. The losses might force the banks to raise additional capital from investors or taxpayers. "The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks," one bank executive said. Financial Times.
Sound somewhat familiar?

Fidelity creates fund for commodity stocks

Fidelity Investments plans to launch Tuesday an equity fund that invests in the stocks of companies in agriculture, energy and metals, both within the U.S. and worldwide. The Fidelity Global Commodity Stock Fund will offer adviser- and retail-class shares. Unlike many commodity funds that invest in derivatives, this fund will buy stocks.

So expect stocks of these three categories of companies to pop while Fidelity ramps up the holdings of these funds.

Market Reflections

Stocks were unable to build on yesterday's big gain. The S&P 500 ended at its lows, down 2% at just over 800. Volume was once again thin in what the optimists say reflects a lack of sellers. The dollar edged about 1 cent higher to $1.3439 against the euro amid talk that U.S.-Europe interest rate differentials are bound to come in as the ECB cuts rates. Oil ended little changed ahead of tomorrow's inventory data with May WTI ending at $53.60. Gold slipped about $10 to $929.00. Treasuries were mixed despite a strong 2-year note auction. The 2-year yield ended at 0.90 percent.

Tuesday, March 24, 2009

Market Reflections

Stocks surged in reaction to the Treasury's latest move to stimulate the banking sector, this time a loan-based program to encourage private funds to bid for toxic assets. In a reversal of the disappointment that greeted an initial Treasury plan in early February, the S&P 500 jumped 7.1% to 822.91 for the biggest gain since the violent swings of October. Adding to the optimism was a big jump in existing home sales, a gain underscoring prospects that government stimulus will make for further jumps in future months. One sour note is that gains were made in comparatively low volumes especially for S&P futures.

Money continues to move out of the dollar which fell nearly 1 more cent to end at $1.3548 against the euro. The exit reflects concerns over monetary inflation and also increasing demand for risk. Concerns over inflation continue to help oil as is the improving economic outlook. May WTI gained nearly $2 to $53.84. Despite the fireworks in the stock market, money stayed in the Treasury market where yields were little changed with the 3-month yield ending at a very tight 0.19 percent. Gold dipped $15 to end at $940.

Monday, March 23, 2009

Treasury Department Releases Details on Public Private Partnership Investment Program

Treasury Department Releases Details on Public Private Partnership Investment Program
Fact Sheet
Public-Private Investment Program
View White Paper and FAQs at
The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:
• Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
• Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
• Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.
The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of "legacy assets" – both real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities"). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.
• Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.
• Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.
The Public-Private Investment Program for Legacy Assets
To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.
Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:
• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.
The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:
• Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
• Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.
• Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
• Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
• Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
• The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
o Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
o Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
o Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
o Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.
Sample Investment Under the Legacy Loans Program
Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
The Legacy Securities Program: The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.
1. Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market: The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).
o Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
o Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
o Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.
2. Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.
 Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
 Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.
Sample Investment Under the Legacy Securities Program
Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.