WASHINGTON – The Treasury Department announced plans yesterday to finally start buying troubled mortgage assets next week in a program that will provide some relief for troubled credit unions, especially corporate credit unions holding large portfolios of underwater mortgage-backed securities.
Five private investments funds have agreed to invest $1.94 billion of their own money and combine it with Treasury loans that will provide more than $12 billion for the Public Private Investment Partnership. The Treasury hopes to expand the program to buy as much as $40 billion in toxic assets from banks, credit unions or securities firms under the program.
A Treasury official confirmed yesterday that credit unions are eligible to participate in the PPIP.
Under the program, the Treasury pledges to match the funds raised by approved money-management firms. On top of that, it will provide leverage, or loans, to the fund, equal to the full amount of the fund -- doubling its spending power. So far, with the potential leverage on offer, the funds that are launching could put $12.27 billion to work, according to the Treasury department.
The program is an outgrowth of the original Troubled Asset Relief Program which was supposed to use $700 billion appropriated by Congress to buy up toxic mortgage assets. Instead, much of those funds was used to prop up troubled banks with equity investments. The Treasury then scaled back the program to leverage private funds to fund the asset buys.
About eight corporate credit unions are especially burdened by toxic mortgage assets, with those eight holding more than $20 billion of unrealized losses on the MBSs portfolios. While the advent of new liquidity into the market will prop up values for those securities, it is not clear whether the corporates will want to sell the MBSs into the program at a disocunt because it will force them to realize some of the losses on those assets.
