Uncle Sam wants insurers to help buy problem loans and securities out of the portfolios of banks and other financial institutions.

The Treasury Department says it will contribute $75 billion to $100 billion in Troubled Asset Relief Program capital to encourage private investors – including insurance companies and pension funds — to buy troubled “legacy loans” and troubled “legacy securities.”

The department seems to assume that the Legacy Loans Program will buy troubled loans mainly from banks, but it seems to be hinting in a fact sheet describing the new “Public-Private Investment Program” that the Legacy Securities Program will buy troubled securities from other types of companies as well as from banks.

The troubled securities to be helped by the program “are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts,” Treasury officials write in the fact sheet.

Legacy Loans Program

The FDIC is supposed to start the Legacy Loans Program by creating a family of Public-Private Investment Funds.

The Treasury Department will own half of the stock in the funds, and “private capital” will own the other half. “The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged,” officials say.

The funds will try to increase demand for troubled bank loans, and to help banks and investors determine the true market value of the loans, by buying pools of whole loans from banks.

To sweeten the deal, the FDIC will guarantee the debt financing issued by the Public-Private Investment Funds to fund the loan purchases, officials say.

Although the Treasury Department will own half of each fund’s stock, “private managers will retain control of asset management subject to rigorous oversight from the FDIC,” officials say.

The Legacy Securities Program

The other new Treasury Department program, the Legacy Securities Program, will give financial services companies a chance to help manage Legacy Securities Investment Funds.

The funds will support “the market for legacy mortgage- and asset-backed securities
originated prior to 2009 with a rating of AAA at origination,” officials say.

“Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets, though we may consider adding more depending on the quality of applications received,” officials say.

The fund managers are supposed to raise cash for the funds. Once the private managers come up with private cash, the Treasury Department will match private capital that is locked into the funds dollar for dollar, officials say. The Treasury Department does not to want to match the private capital in cases in which the private investors have “voluntary withdrawal rights.”

The companies that want to manage the Legacy Securities funds must have at least $10 billion in “eligible assets” already under management, and they must have the ability to raise $500 million in investment fund capital, according to the securities program application.

Applications are due at the Treasury Department’s Office of Financial Stability 5 p.m. April 10.

A second part of the Legacy Securities Program will use “non-recourse loans” from the Federal Reserve to help “eligible borrowers” buy troubled securities.

The participants in this program, which will be part of the Term Asset-Backed Securities Loan Facility, will buy non-agency residential mortgage backed securities that originally were rated AAA and commercial mortgage-backed securities and asset-backed securities that are rated AAA, officials say.

The “haircuts will be determined at a later date and will reflect the riskiness of the assets,” officials say.

Like the Legacy Loans Program, the Legacy Securities Program is supposed to free up frozen markets by helping to generate transactions and give participants an idea of how much the assets involved can fetch in a market that is functioning reasonably well, officials say.

Industry Reaction

The American Council of Life Insurers, Washington, still is studying the proposal, ACLI representative Steven Brostoff says.

The ACLI believes the Legacy Securities Program is open to “financial institutions” as defined in Section 101(a)(1) of the Emergency Economic Stabilization Act, Brostoff says.

That “would include insurance companies,” Brostoff says. “Also, Treasury specifically mentioned illiquid assets held by insurance companies in its public documents. Thus, it appears that insurers holding certain residential and commercial mortgage-backed securities are eligible to participate in the Legacy Securities Program. However, as noted before, we continue to review the proposal.”

Links to government documents describing the program are available here.