Second General Session: The Secondary Market impact of TARP, TALF, PPIP and other Government Financi

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Second General Session The Secondary Market
impact of TARP, TALF, PPIP and other Government
Financial Markets Relief Programs
PwC
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Todays Panel

• ModeratorSteve OConnorSenior Vice
  PresidentMortgage Bankers Association
• SpeakersJeremiah S. BuckleyPartnerBuckleySand
  ler, LLPTom KnoxManaging Director Structured
  Finance GroupPricewaterhouseCoopers

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Alphabet Soup

• TARP - Troubled Asset Relief Program
• TARP Capital Purchase Program to buy up to 250
  billion preferred shares in U.S. controlled banks
  and thrifts. Other planned programs including
  those to purchase "Troubled Assets" from
  financial institutions
• TALF - Term Asset-Backed Securities Loan
  Facility
• Provides up to 1 trillion in loans to lend
  against AAA rated cash ABS backed by auto loans,
  student loans and SBA guaranteed small business
  loans. May potentially include CMBS, non-agency
  RMBS and CLOs
• PPIP - Public-Private Investment Program
• Creates Public Private Investment Funds (PPIFs)
  to invest in troubled assets and uses private
  capital and private fund managers to provide
  market mechanism for valuing troubled assets

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Term Asset-Backed Securities Loan Facility
US Treasury Department (via TARP)
Federal Reserve
Term ABS Loan Facility - TALF
Special Purpose Vehicle
Borrower
TALF Loan secured by ABS collateral
Fed Sr. Debt TARP 20 billion
Secured Collateral
AAA Rated ABS Notes
TALF Loan
Custodian Bank

• Federal Reserve Bank of New York
• Non-recourse prepayable 3-year fixed / floating
  debt secured by the eligible ABS collateral
• Loan amount equal to the principal balance of the
  collateral minus a haircut, which will be
  determined based on the type of asset and
  duration of security.
• Any remittance of principal on eligible
  collateral must be used immediately to reduce the
  principal amount of the TALF loan in proportion
  to the original loan-to-value ratio
• Minimum loan will be 10 million

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Eligible Collateral

• Cash (not synthetic) U.S. dollar-denominated
  issued on or after January 1, 2009
• ABS that have long-term credit rating in the
  highest rating category from two or more major
  NRSROs (and no ratings below the highest rating
  category from a major NRSRO)
• Substantially all of the underlying credit
  exposures must be newly or recently originated
  exposures to U.S.-domiciled obligors with the
  following issuance criteria, including all or
  substantially all of the underlying credit
  exposures of eligible
• Type of Asset Originated (Disbursed) on or
  After
• Auto / equipment loans (leases) October 1,
  2007
• SBA-guaranteed loan January 1, 2008
• Student Loan May 1, 2007
• Mortgage servicer advances January 1, 2007
• Eligible credit card ABS must be issued to
  refinance existing transactions maturing in 2009
  and must be issued in amounts no greater than the
  amount of the maturing deals
• Floorplan loans including revolving lines of
  credit originated on or after January 1, 2009
• Eligible Student loans include Federally
  guaranteed student loans and private student
  loans
• Eligible small business loan ABS include
  transactions for which all of the underlying
  credit exposure are fully guaranteed as to
  principal and interest by the U.S. government

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TARP Considerations

• Eligible Borrowers
• A business entity or institution that is
  organized under the laws of the U.S. or a
  political subdivision or territory thereof (U.S.
  organized) and conducts significant operations or
  activities in the U.S.
• A U.S. branch or agency of a foreign bank that
  maintains reserves with a Federal Reserve Bank
• An investment fund that is U.S. organized and
  managed by an investment manager that has its
  principal place of business in the U.S.
• Includes hedge funds, private equity funds, and
  mutual funds
• Legislative Considerations
• Executive Compensation Requirements
• Borrowers will NOT have to satisfy the executive
  compensation requirements
• The Sponsor of the securitization that issues the
  ABS must be in compliance with the executive
  compensation requirements
• Reports to Congress and continued oversight by
  Congressional Oversight Committee, EESA s.105

Source TALF Terms and Conditions dated
2/06/2009 and FAQs dated 12/19/2008 from the
Federal Reserve Bank of New York website -
http//www.newyorkfed.org/markets/talf.html
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TALF Results - March 2009

• 8.2 billion in TALF eligible securities (4.71
  billion in requests for TALF loans)
• Citi Credit Card / Ford Motor Credit / Nissan
  Automotive Finance / Huntington Auto Finance
• Spreads narrowed for new TALF eligible AAA
  collateral
• Issuer and investor demand less than originally
  expected
• Issuer Economics not compelling versus other
  funding alternative Rating agency increased
  subordination requirements significantly
  Origination volumes have fallen dramatically
  compliance process time consuming
• Investor Approval process overly difficult and
  intrusive Political risk - the rules might
  change after closing Lack of Off Balance Sheet
  financing
• TALF going forward
• Next subscription date is May 5th
• Treasury and FRB remain committed to TALF and
  restarting the market
• Tremendous political pressure to expand the
  program asap and get it right
• TALF is an integral part of the Federal
  Governments disposition strategy for troubled
  assets
• Changes continue to be made almost weekly by the
  FRB to allow for much greater participation by
  issuers and investors
• Significant interest for future subscriptions

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Public Private Investment Program (PPIP) -
Overview

• Using 75 to 100 billion in TARP capital and
  capital from private investors, the PPIP will
  generate 500 billion in purchasing power to buy
  legacy assets
• Two pronged approach potential to expand to 1
  trillion
• Legacy Loans Program Combine FDIC guarantee
  debt financing with shared equity capital from
  the private sector and the Treasury to support
  the purchase of troubled loans from insured
  depository institutions.
• Legacy Securities Program Combine financing
  from the Federal Reserve and Treasury through the
  Term Asset-Backed Securities Loan Facility
  (TALF) with equity capital from the private
  sector and the Treasury to address the problem of
  troubled securities.
• Together, the two programs should help to restart
  markets for troubled assets and begin the process
  of repairing balance sheets. Stronger balance
  sheets should eventually lead to increased
  lending.

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Public Private Investment Funds Legacy Loan
Program
US Treasury
Private Investors
FDIC
50 or more of equity
50 or less of equity
Warrants
Sponsor
Guarantee
Legacy Loan Fund
Debt Investors
Selling Bank or Thrift
Eligible assets
Debt
Cash, possibly
Proceeds
debt

• Legacy Loan Fund
• Combine FDIC guarantee debt financing with share
  equity capital from the private sector and the
  Treasury to support the purchase of troubled
  loans from insured depository institutions.
• Goal Cleanse bank balance sheets of troubled
  legacy loans and reduce the overhang of
  uncertainty associated with these assets by
• Banks provide FDIC a list of the assets ( i.e.
  pool of mortgages), they wish to sell.
• The FDIC, using outside experts, analyze the pool
  and determine the debt level the FDIC is willing
  to guarantee, (max 6 to 1).
• An eligible pool with FDIC guaranteed committed
  financing will be auctioned to qualifying
  bidders.
• Winning bid combined with FDIC guaranteed debt
  will define the price offered to the selling
  bank.
• The selling bank must decide whether to accept
  the price.
• If sold, the private capital partners will
  control the assets, subject to strict oversight
  from the FDIC.
• FDIC will play ongoing reporting, oversight and
  accounting role on behalf of the FDIC and
  Treasury.

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Public Private Investment Funds Legacy Loan
Program

• Private Investors
• Private Investors are expected to include
  (among others), financial institutions,
  individuals, insurance companies, mutual funds,
  publicly managed investment funds, and pension
  funds.
• Private Investor must be approved by the FDIC,
  and cooperation between Private Investor groups
  will be prohibited once the auction process
  begins to maintain fairness.
• The U.S. Treasury Department and FDIC will
  encourage participation by small, veteran-,
  minority-, and women-owned groups.
• Assets
• Troubled assets held by U.S. banks and thrifts
• Assets and any collateral supporting them must be
  located in the U.S.

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Public-Private Investment Program Legacy
Securities Program
US Treasury
Private Vehicle
TALF and/or Private Debt
Debt (max leverage ratio of 1/1)
50 of equity
Warrants
50 of equity
Eligible assets (initially MBS only)
Controls
Fund Manager
Legacy Securities Fund
Financial Institution
Manages
Cash

• Legacy Securities Fund
• Designed to encourage private capital investment
  of legacy securities by providing matching equity
  capital under the PPIP and debt financing from
  the TALF
• Goal Restart the market for legacy securities
  allowing financial institutions to free up
  capital and stimulate new credit using two
  related programs
• Expansion of TALF for Legacy Securities
• Non-recourse loans made available to eligible
  investors to fund purchases of legacy
  securitization.
• Borrowers need to meet certain criteria and
  haircuts are based on riskiness of the assets
  will reduce the amount lent.
• Legacy Securities PPIFs
• Treasury expects to approve at least 5 Fund
  Managers to establish public-private investment
  funds
• Qualified Fund Managers will receive matching
  equity for every dollar of private equity raised.
  

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Public Private Investment Program - Legacy
Securities

• Fund Manager Eligibility
• Demonstrated capacity to raise at least 500
  million of private capital
• Demonstrated experience investing in these
  securities, including thorough performance track
  records
• A minimum of 10 billion (market value) of RMBS
  and CMBS under management
• Demonstrated operational capacity to manage the
  fund in a manner consistent with the US Treasury
  Departments goal of generating attractive
  returns taxpayers and private investors
• Headquartered in the United States
• Holistic approach to reviewing applications
  (April 6, 2009)
• Asset Eligibility
• Non-agency RMBS originally rated AAA
• Outstanding CMBS and ABS rated AAA
• Originated prior to 2009

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Public Private Investment Program Unanswered
Questions

• Details yet to be released
• Haircuts
• Lending rates
• Loan durations
• FDIC Guarantee Fee
• Executive compensation restrictions
• Program governance, reporting requirements and
  compliance
• Warrants
• Determination of Eligible Assets, Approved Fund
  Managers, Private Investors
• Will troubled asset holders sell??

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QA