US Toxic Securities Funds Launch Seen at $20 Billion

The U.S. Treasury will launch its public/private investment fund program to buy up toxic securities with an initial funding of $20 billion from public and private sources, a level scaled back considerably from initial plans, people familiar with the matter said on Thursday.

Nine funds chosen by the Treasury will raise about $1.1 billion each from private investors, and the Treasury will match that amount with taxpayer dollars, said the sources, who were not authorized to speak publicly about the plan. But they said the announcement and timing of the program's launch remains uncertain, the sources said.

A spokesman for the U.S. Treasury declined to comment.

The Public-Private Investment Program, or PPIP, was a key part of the Obama administration's early efforts to shore up a frail banking sector, aiming to cleanse banks' balance sheets of toxic mortgage assets that were choking off lending and eroding confidence in the financial system's viability.

After a sketchy initial outline disappointed markets in February, U.S. Treasury Secretary Timothy Geithner announced ambitious details for the program in March to buy up to $1 trillion of securities and whole bank loans through public-private funds.

• Bank Failures in 2008

Since then, expectations about the overall toxic asset plan have been scaled back considerably as banks have proven they can attract private capital in both the equity and debt markets without first selling off illiquid securities.

What is more, sources familiar with the government's plan said the program's potency has been diluted due to a lack of seller enthusiasm on the part of banks and financial firms, and caution on the part of potential buyers regarding regulation.

"The market has already moved in a direction that may make the program unnecessary," said an investor familiar with the government's plan. "I don't think this is going to happen."

A recent rally in financial and bank stocks has allowed lenders to strengthen their balance sheets, thereby decreasing the need to sell their toxic assets at fire-sale prices.

At the same time, many investors are hesitant about partnering with the U.S. government for fear that it could later change the guidelines mid-stream.

A sister plan to launch auctions for whole bank loans run by the Federal Deposit Insurance Corp was recently shelved for the time being, due to lack of interest from both selling banks and investors.

• Financial Crisis: Then and Now

However, Obama administration officials have said the toxic asset plan, even if it never reaches its initially intended volume, would be valuable if it helped to jump-start private markets for distressed bank assets. They also say it is valuable as a "backstop" for markets that could be activated or expanded -- if financial conditions worsen.

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