April 6, 2009 / 1:15 PM / 10 years ago

Treasury eases terms for asset fund managers

WASHINGTON (Reuters) - The U.S. Treasury on Monday eased terms for fund managers to apply to its toxic securities investment program and said it will consider widening the number of companies it allows to run public-private investment funds under the program.

The moves are aimed at maximizing the inflow of private capital into the market for distressed assets that are constraining bank balance sheets. Treasury said it extended the deadline for applications by two weeks to allow firms more time to digest the new guidance and prepare their applications.

The investments, known as “legacy” securities, mostly comprise securities backed by failing or distressed commercial and residential mortgages written during the real estate boom.

After an initial group of about five larger firms are qualified, Treasury will consider opening the program to smaller firms.

“The new guidance extends the deadline for the application to the program and clarifies that participation criteria will be viewed holistically — failure to meet any one criterion will not necessarily disqualify a proposal,” the Treasury said in a statement.

In addition to generating potentially more sources of private investment and competition for the toxic assets, bringing additional fund managers into the program could help address complaints that the financial rescue is being dominated by Wall Street elites.

The Treasury also is encouraging minority- and women-owned firms to partner with the five larger firms.

The application deadline is now April 24, with preliminary selections expected by May 15. Those firms will get 12 weeks to raise $500 million in private capital each — a time frame that could push initial asset purchases into late August.

The Treasury had hoped to have its asset clean-up programs in place shortly after “stress test” results for the 19 largest U.S. banks are complete at the end of April. That way, banks that were told to raise capital had an alternative method of strengthening their balance sheets — by selling assets to public-private investment funds.

BROADER DISCRETION

The securities investment program is a key component of the of the Treasury’s effort to flush $500 billion to $1 trillion worth of distressed assets from bank balance sheets. It also includes a program with the Federal Deposit Insurance Corp. to auction whole loans to investors and an expansion of the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) to help provide financing for these purchases.

When the program was first detailed last month, the Treasury said that for money managers to be selected to run one of about five public-private investment funds, firms had to prove an ability to raise $500 million in private capital, have a minimum of $10 billion in mortgage-backed securities under management, a proven track record in these securities, and headquarters in the United States.

While it said it is maintaining these criteria, the “holistic approach” will allow Treasury more discretion in selecting fund managers based on the available applications.

“The number of fund managers may be increased depending on the Treasury’s evaluation of the applications received and determination of what is in the best interests of taxpayers,” the Treasury said in its guidance. “Treasury will consider expanding the program through additional fundings in the future.”

MARKET TO DETERMINE FUNDING

A Treasury official said of the Treasury’s $100 billion in funding allocated for the bank asset cleanup program, $25 billion would go to expand the securities used as collateral for the Fed’s TALF program, while $75 billion would be split between support for the FDIC loan auctions and the legacy securities funds. The split between the loans and securities programs would be determined by market demand, he said.

Under the securities program, Treasury will match private capital raised, and then provide leverage in the form of senior secured debt up to 100 percent of the total capital or unsecured debt up to 50 percent of the capital. The fund could then leverage additional money through the Fed’s TALF.

In an effort to prevent conflicts of interest, the Treasury said financial firms that want to become primary investors in an asset fund cannot sell their own toxic securities to that fund. It said the funds will be long-only funds that follow a long-term buy and hold strategy, but it will consider allowing them appropriate hedging proposals such as interest rate hedging programs.

Additional reporting by Patrick Rucker; Editing by Leslie Adler

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