PPIP Overload: Things You Don’t Want To Know About

Well, I did it. I made myself read the PPIP white paper and overview. At the risk of sending you screaming into the night, here are a couple observations.

First, it’s complicated and I suspect that the CNBC talking heads have no real idea how much so. Governments are very skilled at putting together stuff like this as they know that the average citizen is going to yawn and go on to other things and the average legislator won’t understand it. You can hide an awful lot along with the devil in details.

There are really two parts to the program. One provides for the purchase of loans from the banks. This is the program that everyone is talking and writing about. It provides for the 6:1 leverage and the 50/50 profit sharing. Note that it is only for loans not for securities. So MBS, CMBS and other exotics fall into the securities program.

The part of the program designated to purchase securities is divided again into two parts.

One uses the TALF to provide loans to parties that wish to buy securities from the banks. This program isn’t finalized according to the white paper. Conceptually, the Fed will expand the TALF to provide loans to purchasers of non-agency RMBS that were originally rated AAA and CMBS and ABS that are rated AAA.

Before I go to the second part of the securities program note the big changes to TALF that this involves. Originally, TALF was restricted to new AAA securities, not existing securities. It’s purpose was to jump start the securitization market. Now it appears as if it can buy any existing security, they don’t have to be new issues, and in the case of RMBS only have to have been rated AAA once upon a time. TALF is a Fed lending program so this represents a significant increase in the amount of credit risk that the Fed will take onto its books.

The second part of the securities piece involves the infamous fund managers that the Treasury intends to select to manage the securities purchased under this section of the plan. This one gets vague. Originally, it describes a 50/50 equity participation on the part of the government and investor with the government lending an additional 50% to the partnership but under certain circumstances it may lend up to 100%. However, in another section it talks about the potential for an additional 100% debt contribution from the Treasury and then says that these loans will be subordinate to any TALF loans.

It’s impossible to determine based on the information available just how much leverage might be involved in any given transaction under this section. Furthermore, if I read it correctly, each deal is going to be negotiated based on the assets being purchased. Essentially each deal will have a unique structure. Look out!

The securities purchased under this section will initially be non-agency RMBS and CMBS originated prior to 2009 and originally rated AAA. Once again they do not have to carry a AAA rating at the time of purchase.

Anyone still out there? Have you all nodded off?

That’s the program. Whether it’s good or bad is moot. It’s what we’re going to get. May the Force be with us.

more: here (link to the government website)

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