Capital Markets Update by Stephen Blank
Treasury Secretary Timothy Geithner announced on February 10 a wide-ranging plan aimed at "rescuing," "recapitalizing," and stabilizing the U.S. financial services sector through a mix of government and private capital.
Among the initiatives announced by the Treasury Secretary was a plan to combine the financial resources of the private sector with those of the government through a "public/private partnership" investment fund targeted at "liquefying loans and assets" currently "frozen" on the balance sheets of financial institutions. These are the often-referred-to "toxic assets" whose presence on financial institutions balance sheets is forestalling the resumption of all classes of lending.
Among the questions remaining unanswered is "price" to be paid for assets held on the balance sheets of financial institutions: low purchase prices means increased losses for the sellers, which financial institutions' balance sheets cannot currently absorb; high prices place increased risk of loss on taxpayers' shoulders.
The newly announced financial architecture known as the "Financial Stability Plan" includes the following "features":
1. An expansion (by as much as $1 trillion) of the Term Asset-Backed Securities Loan Facility (commonly referred to as TALF and which has been renamed the Consumer and Business Lending Initiative) and the assets it can purchase to include newly issued and newly credit-rated Triple-A commercial mortgage-backed securities as well as private-label mortgage-backed securities.
[While this is an encouraging sign, the CMBS industry has been on "life support" since mid-2007, with many of the largest origination platforms dismantled. Our sense is that it will take considerable time to restart securitization programs, so while helpful in the long run, it is not the proverbial "silver bullet" as it will take a long time to regear securitization programs, and this assumes that managements are willing to commit capital to the business model that has just recently been a source of incredible financial grief.]
2. A public/private investment fund whose objective will be to acquire "toxic" legacy loans and assets from financial institutions, thereby providing much-needed liquidity, allowing lending to slowly recommence, and secondary market trading and investment to do likewise.
As discussed above, the "what price" as well as many other questions remain unresolved and as they say, "the devil is in the details." Operational details remain scarce and undefined and we expect to provide continuing analysis and updates as details become available.
ULI Senior Resident Fellow Stephen Blank
ULI LA Capital Markets Update
Posted February 11, 2009
