Tarpley & Underwood
Financial Advisors, LLC
The Legacy Securities Program. This effort will offer private-sector investors non-recourse loans so that they can buy up troubled mortgage-backed securities and asset-backed securities that were once highly rated. The Federal Reserve gets involved here. The Fed will broaden the scope of its Term Asset-Backed Securities Loan Facility (TALF) to take on assets such as residential mortgage-backed securities. (TALF has only received requests for $4.7 billion in loans, yet TALF has up to $200 billion to offer.)1,3
The Treasury will recruit multiple asset managers to buy up the illiquid securities, and they will be given time (to raise private capital), money (matching funds from the Treasury) and help (if they wish, they can call on the Treasury to request “senior debt” equivalent to 50-100% of the fund’s capital level).1
Will it work? The partnership plan will certainly take weeks or months to have real impact. Noted economist Mark Zandi of MoodysEconomy.com thinks another $400 billion is needed to effectively attack the problem.3 Vincent Reinhart, who used to direct the Fed’s Monetary Affairs Division, told Bloomberg.com on March 23, 2009 that should the program prove a bust, the Obama administration “will have to use the machinery of resolution” – nationalization.
Dow gains 497.48. Investors are confident about the plan: the Dow Jones Industrial Average soared 6.8% on
March 23,2009 finishing at 7,775.86. The S&P 500 rose 7.1% on the day to 822.92 and the S&P Financial Index climbed approximately 18% on the day. The rally capped the greatest two-week gain for the S&P 500 since 1938.5
These are the views of Peter Montoya Inc., not Tarpley & Underwood Financial Advisors, LLC, and should not be construed as investment advice. Neither Tarpley & Underwood Financial Advisors, LLC nor Peter Montoya Inc. gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a Financial Advisor. Please consult your Financial Advisor for further information.
Citations
1 online.wsj.com/article/SB123780994825213465.html [3/23/09]
2 bloomberg.com/apps/news?pid=20601087&sid=ajiVjxYZ.AjM&refer=home [3/23/09]
3 usatoday.com/money/economy/2009-03-22-recovery-plan-one-trillion_N.htm [3/23/09]
4 online.wsj.com/article/SB123776536222709061.html
[3/23/09]
[3/23/09]5 bloomberg.com/apps/news?pid=20601087&refer=top_news&sid=alCbS6cEpJsQ[3/23/09]
[3/23/09]
Now let’s look at the components of the PPIP.
The Legacy Loans Program. Roughly half of the TARP funds in the PPIP will be used to set up this program, which will be managed by the FDIC. Through this program, the Treasury Department and private fund managers will provide the capital to purchase a pool of loans from thrifts. (The FDIC will guarantee financing for investors up to six times the equity provided.) The FDIC will then auction off these pools of loans, which will be managed by the private-sector investment firms under FDIC supervision. Banks will indicate what assets they want to sell, and the FDIC will make a determination of how much funding it is willing to guarantee.1,2
Sec. Geithner discusses the PPIP at a press briefing on 03/23/2009
