Treasury finally “unveiled” details of the much-anticipated, much-delayed and now scaled-down version of its toxic or “legacy” assets purchase program, which was announced earlier as a part of the Financial Stability Plan in February.

The Public-Private Investment Program, or PPIP, will leverage private capital with government subsidies, so that the chosen investment firms can buy up the legacy assets, which have been clogging the balance sheets of the banks, making them reluctant to lend. The Treasury selected nine financial firms as partners for the program, including BlackRock Inc (BLK), Invesco Ltd (IVZ) and GE Capital Real Estate, a subsidiary of GE (GE). PIMCO (PKO), which was widely expected to be on the list, announced that it had withdrawn from the program due to related uncertainties.

The nine firms chosen have been given up to three months to raise an initial $500 million each to begin participating in the program.

The market situation since the program was originally announced has changed a lot — credit conditions have eased and the banks are now able to raise private capital on their own. Besides the legacy assets (mainly mortgage backed securities), the banks now face a bigger threat from the residential real estate, commercial real estate and consumer loans on their balance sheets, as the housing and commercial real estate pricing continues to deteriorate and unemployment continues to rise.

Further, there may be a growing lack of interest on the part of banks to sell these legacy assets since they seem to believe that they could get a better valuation later.

But even the scaled-down version of the program could serve an important purpose of helping to establish a market for these securities that have been impossible to price. Further, it is necessary to have the program ready, in case the economic recovery falters. Last month, the Bank for International Settlements (BIS) had warned that taxpayers still face potentially large losses because the governments have failed to act quickly enough to remove toxic assets from the balance sheets of important banks. The Treasury said that the program could be expanded if the economic situation deteriorates.

It is unclear whether or when the Treasury and the FDIC will launch the so-called Legacy Loan Program, which is designed to remove problematic, illiquid individual loans from the books of banks. In yesterday’s release, the Treasury said that “FDIC remains committed to building a successful Legacy Loan Program and will be prepared to offer it in the future.”
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