Treasury’s distressed debt plan to begin with $20 billion

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: The US treasury department may begin its programme to spur purchases of mortgage-backed securities from banks with about $20 billion in public and private money, down from as much as $100 billion when it was announced in March, two people familiar with the matter said.

The treasury plans to provide about $1.1 billion in capital to eight to 10 money managers it will pick for the Public-Private Investment Programme, according to the people, who asked not to be identified before the details are announced. The firms will raise about $1.1 billion each for funds to buy distressed mortgage securities, less than they had expected the government to support. The plan also will include about $10 billion in government-backed loans.

The government unveiled the program when losses tied to home loans hobbled banks such as Citigroup Inc and Bank of America Corp and threatened to choke off lending needed to revive the economy. Since then, the 19 largest US banks raised more than $100 billion by selling equity and assets, swapping preferred shares for common and offering debt, easing concern that the lenders couldn’t handle a deeper, longer recession.

“It wouldn’t shock me if the program never gets any bigger than this,” said Douglas Elliott, a fellow at the Brookings Institution in Washington and a former investment banker. “It would be nice see these assets moved off the balance sheets of banks, but I don’t think it’s critical anymore.”

A separate portion of PPIP, run by the Federal Deposit Insurance Corp and designed to aid the sale of whole loans from banks to investors, was postponed indefinitely last month. Treasury secretary Timothy Geithner said then that interest in such US programs may be waning as market confidence improves.

Geithner said in March that the government might commit as much as $50 billion in public capital to match PPIP funds raised by private firms. Treasury officials have said the program could be rolled out in stages and expanded over time.

Andrew Williams, a treasury spokesman, declined to comment. The department may announce the program’s start as soon as next week.