Treasury Unveils Two Plans to Buy Toxic MBS

The Treasury Department on Monday unveiled two separate programs for the removal of more than $500 billion in toxic private-label mortgage-backed securities and bad real estate loans from the balance sheets of financial institutions. Both initiatives involve the participation of private investors willing to partner with the federal government, which is putting up financing and 50% of the capital for the these public-private partnerships. Under the new effort, federally insured depositories can sell troubled real estate loans into pools that the Federal Deposit Insurance Corp. will auction off to the private investors. Treasury and private capital will provide equity financing and the FDIC will provide guaranteed debt financing issued by the public-private investment funds. The second program is designed to remove formerly AAA-rated residential and commercial MBS from the balance sheets of banks and other financial institutions. However, Treasury and the Federal Reserve Board are still working the details of this program, which will provide non-recourse loans to investors willing to purchase these "legacy securities" and employ a long-term buy and hold strategy. "Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes and loan duration have not yet been determined. Asset managers selected by the Treasury and FDIC will oversee the public-private investment funds."