Client Alert

Because of the rapidly changing conditions in the financial markets, we have established this special series of Client Alerts to advise you of the newest economic and legal developments and their wide-ranging business implications.

On March 23, 2009, the U.S. Treasury unveiled a new plan for dealing with the vexing problem of repairing bank balance sheets—a plan that could hold great appeal to the investor community. Through two separate programs, Treasury hopes to encourage private investors to partner with the government to move so-called "toxic" legacy assets off the balance sheets of participating banks through sales to Public-Private Investment Funds ("PPIFs"). The first of these two programs deals with sales of mortgage-backed and asset-backed securities to PPIFs, and the second deals with sales of commercial and residential mortgage loans to PPIFs. This second program, termed the Legacy Loans Program, is the subject of this Client Alert.

A PPIF in the Legacy Loans Program will be an entity that is owned by a private investor and the U.S. Treasury, who will each contribute equity capital in equal proportions. The PPIF will secure financing through the issuance of FDIC-guaranteed debt in a leverage ratio that could be as high as 6-to-1. As a result, an eligible private investor in the Legacy Loans Program will be able to leverage its equity dollars at a ratio of up to 12-to-1, though the investor will need to share any upside equally with Treasury after servicing the FDIC-guaranteed debt.

As with any government program in its formulation stage, there are many questions that remain unanswered. This Client Alert seeks to address what is known, what is unknown, and what investors can do now to prepare for this coming opportunity.

Despite what is unknown, one thing is clear. Private investors will need to address themselves to a host of unconventional issues when partnering with the federal government. Beyond mere transaction structuring, capital formation and asset-level due diligence, eligible investors should prepare for operations in a highly regulated environment when participating in the Legacy Loans Program.

To find out more about the Legacy Loans Program, please click here to read our Client Alert.

For questions or for further guidance, please contact the authors of this Alert, Don Lampe; Stan Wrobel, email; or Kevin Pigott, email, or another member of the Economic Stability & Solutions Team at Womble Carlyle Sandridge & Rice. We will continue to monitor developments regarding the Legacy Loans Program in the coming weeks.