UPDATE: Treasury Seen Launching Toxic Asset Program This Week

The U.S. Treasury Department this week is likely to launch its delayed financial-rescue program to address toxic assets weighing on banks' balance sheets, according to an analyst with Eurasia Group.

The analyst said the Public-Private Investment Program (PPIP) legacy securities program is set to launch as early as Wednesday.

However, a Treasury Department spokesman wouldn't confirm that an announcement is imminent.

Up to six fund managers are likely to participate by launching their individual investment funds, Eurasia Group analyst Sean West wrote. Through the funds, financial firms plan to work with the federal government to purchase soured assets.

"The fact that Treasury plans to proceed with the program is good news for markets in these assets and the firms that currently hold them as their values are at least in part propped up by the government's commitment to move forward with PPIP," West wrote.

Under the Public-Private Investment Program, Treasury plans to partner up with private firms to help restart the market for distressed assets, mainly mortgage-related loans, that sit at the heart of the financial crisis.

In July, U.S. regulators announced they had chosen BlackRock Inc. (BLK), Invesco Ltd. (IVZ) and seven other firms as investment managers.

The full list of pre-qualified firms includes: AllianceBernstein LP (AB) and its sub-advisers Greenfield Partners, LLC and Rialto Capital Management, LLC; Angelo, Gordon & Co., L.P. and GE Capital Real Estate; BlackRock, Inc.; Invesco Ltd.; Marathon Asset Management, L.P.; Oaktree Capital Management, L.P.; RLJ Western Asset Management, LP; The TCW Group, Inc.; and Wellington Management Company, LLP.

That announcement made way for the nine firms to go out and raise capital needed to participate in the program. Each pre-qualified manager was given 12 weeks to raise at least $500 million of capital from private investors.

The firms must invest a minimum of $20 million of capital into investment funds that will purchase banks' soured securities. Treasury estimates the market for toxic securities to be about $2 trillion.

Meanwhile, the Treasury Department - which has committed to investing up to $30 billion of equity and debt in the funds - will match the equity capital raised from the private investors. Over two months, Treasury evaluated more than 100 applications to participate in the PPIP program.

PPIP is a program that has continually faced delays, and there are some questions about whether banks will be willing to take advantage of the program and actually sell their assets at deep discounts.

In May, Treasury pushed to June its announcement of the fund managers it has deemed pre-qualified to participate in PPIP, saying it had received more applications from potential fund managers than it had anticipated.

Additionally, Treasury recently began warning that interest in the PPIP may lessen, as confidence picks up in U.S. financial markets.

Similarly, the International Monetary Fund in June released a report on the U.S. economy that raised questions about the level of participation in the program.

"It remains to be seen whether the facility will be extensively used, as banks may have to book significant losses on loans sold and investors may fear restrictions on (for example) compensation," the IMF report said.

Former U.S. Treasury chief Henry Paulson had initially set out to make ridding banks of their toxic assets the centerpiece solution to the financial crisis. But he later made a controversial about-face and decided to instead inject capital from the $700 billion Troubled Asset Relief Program, or TARP, into banks.

Now, almost one year later, Treasury is expected to move forward on the program.

The step forward "indicates that Treasury is less concerned with political pressure in calculating its 'exit strategy' and more concerned with implementing programs that it believes can ultimately improve bank balance sheets and restore the normal flow of credit in the economy," West said in his research note. "However, some investors are concerned that that the program is too small, while others are skeptical that banks are actually willing to sell these assets."

-By Maya Jackson Randall, Dow Jones Newswires; 202-862-9255; [e-mail]