Treasury Eyes Public-Private Investment Fund

"Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses. As we do each of these things, we will impose new, higher standards for transparency and accountability," Treasury Secretary Timothy Geithner says in prepared comments.

The most notable feature for the CRE industry is a $500-billion endeavor to convince private sector entities such as hedge funds and equity pools to purchase toxic mortgage-backed debt from banks. Fittingly called Public Private Investment Fund, the program will leverage the Federal Reserve Bank's balance sheet to loan money for the purchase of these assets. FDIC, for its part, will provide guarantees that their value will not drop below a certain level.

The Financial Stability Plan also expands the $200-billion TALF facility--formed last year to support consumer lending--to as much as $1 trillion. Part of this money will be used to purchase AAA-rated CMBS--a huge relief to the industry. "If executed properly, this could have a significant impact on commercial lending and specifically on getting CMBS moving," Brendan Reilly, SVP of government relations for CMSA, tells GlobeSt.com.

Treasury will also be injecting additional capital into banks through a Financial Stability Trust. "We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term," Geithner says. "We want their balance sheets cleaner, and stronger." Part of the plan includes forthcoming measures that improve disclosure as well as a new funding mechanism that, like the Public-Private Investment Fund, leverages Treasury capital as a bridge to private capital. "The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support," Geithner says. "And this assistance will come with terms that should encourage the institutions to replace public assistance with private capital as soon as that is possible."

If these measures sound familiar that is because they are: many were introduced under the Bush administration. However the Treasury department under Geithner has made some significant tweaks to these programs, expanding their scope in some cases and putting limits on banks' use of the TARP funds in others. Also--and this is key to the CRE industry, many believe--there is a component in this plan to buy up toxic debt. The previous Administration first announced its intention of buying up these assets, and then later backed away from the plan.

"The industry is excited about the plan because the market is all but paralyzed now," Morris Missry, an attorney and Chairman of Real Estate with New York-based Wachtel & Masyr, tells GlobeSt.com. Much depends on the details and execution and ultimate scope of the plan--none of which will be clear right away. Still, though, Missry says, the plan "creates a bottom for these toxic assets that no one has wanted to buy. The government involvement reduces the indefinite risk the investor would be taking on."

Not surprisingly there are critics of the plan--with well-founded concerns. For instance, there are not strict mandates for the banks receiving TARP funds to actually lend. Banks receiving capital from TARP funds will have to submit plans that describe how they will use the money to support their lending operations. New rules will also restrict banks from using the money to acquire other banks, such as was the case when PNC Financial Services Group announced last Fall it was acquiring National City Corp., for $5.2 billion in PNC stock and $384 million in cash. PNC reported that it would receive $7.7 billion in cash by selling stock and warrants to the government.

Many feel this is not enough to prevent abuses or mismanagement. "The language is so murky that, at end of the day, no one will know what is happening," Edward Mermelstein, managing partner at Edward A. Mermelstein & Associates, a New York-based real estate law firm, tells GlobeSt.com. In addition, he is concerned that the plan will mask a fundamental weakness in the financial system: that banks are not properly writing down the assets they have on their books. "This plan will just continue to mask a problem that we will have to address sooner or later."