Geithner’s PPPlan

David Snow explains why the Treasury’s new attempt to fix the real estate loan glut bodes well for infrastructure.

Interviewed last week in Toronto, Graeme Bevans, the head of infrastructure for the CPP Investment Board, said the US government had two choices in building infrastructure. It could choose to leverage government dollars with private capital and debt, or it could choose not to.

Based on the details of the new Public-Private Investment Program (PPIP) released by US Treasury Secretary Timothy Geithner this week, it appears that the Obama team sees wisdom in leveraging its dollars.

David Snow

The plan, known as PPIP, is aimed at mopping up toxic real estate debt and related securities. The way Geithner plans to pursue this fix seems to mirror exactly what the private investment market is hoping will come to pass for America’s crumbling infrastructure: leveraging federal dollars with private capital.

Indeed, PPIP is an ambitious, audacious attempt to do precisely this by sitting private capital at the same table as the US government to try to jointly digest the assets that have caused mass poisoning. 

More importantly for infrastructure, PPIP signals something important  – a government acknowledgement that private capital needs to play a central role in fixing a disaster of capitalism’s own doing.

PPIP will set aside as much as $1 trillion to “maximise the impact of each taxpayer dollar” spent trying to jump-start the economy, according to the Treasury. It divides the universe of troubled assets into two broad types: real estate loans and securities backed by real estate loans, which Treasury calls “legacy loans” and “legacy securities”, respectively.

Almost anyone is invited to snap up legacy loans. The legacy securities programme, on the other hand, will be limited to possibly only five major US asset managers who can prove expertise with these kinds of assets – identified specifically as RMBS, CMBS and ABS securities originally rated triple-A.

The terms of the government’s offer to private capital managers is generous enough to stimulate serious interest. Those who wish to buy pools of loans will be able to do so with as much as 6-to-1 government leverage and 50 percent matching equity from Uncle Sam. A fund manager could end up controlling an $84 million portfolio with just $6 million of its own equity.  

The five-or-so managers selected to snap up legacy securities will get up to $3 of government co-investment and debt for each $1 in equity they pony up.

The Obama administration and the Democratic Congress want to spend many more dollars to fix and transform the US economy, and the first details of PPIP should encourage private capital managers that, amid the Wall Street bonus outrage, their pursuit of profit will be considered an essential ingredient to the success of this and future stimulus plans. 

Perhaps, then, there is reason to hope that some elements of this recipe will repeat themselves in the upcoming debate about the reauthorisation of the US' transportation spending bill.
P.S.: Bevans and CPP Investment Board head of private investments Mark Wiseman are the featured profile in the April issue of Infrastructure Investor magazine, available now via subscription. Click here to learn more. To subscribe, cite code IIBD02 to secure your registrant discount.