[lbo-talk] Next gift to the banks?

Marv Gandall marvgandall at videotron.ca
Wed May 27 08:27:05 PDT 2009


Banks Aiming to Play Both Sides of Coin Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taxpayer Aid From Own Loan Books By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG Wall Street Journal MAY 27, 2009

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

Federal officials haven't specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

"Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.

The New York trade group represents 10 of the world's largest banks, including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Those banks are seen as likely sellers of assets using PPIP. Officials at the banks declined to comment.

"It's an issue that's been raised and an issue we're aware will need specific guidelines," said an FDIC spokesman, adding that the agency still is working on the final structure of its program and plans to launch a $1 billion pilot program this summer, which likely won't include an infusion from the Treasury.

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.

"To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm's books but really doesn't offload it is highly problematic," said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

"The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts," said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

One risk is that certain hard-to-value assets mightn't be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

"Sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a backdoor effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage," said Daniel Alpert, managing director at Westwood Capital LLC, an investment bank.

Even supporters of letting banks buy their own loans said it could be a tough sell.

"A bank bidding on its own assets really has the potential to look awful in the public's mind," said Mark J. Tenhundfeld, an American Bankers Association lobbyist. Some bankers said the concerns can be addressed through strong oversight by the government and outsiders.

The banking industry's lobbying is meant to overcome a hurdle facing PPIP: unwillingness by banks to sell assets at steep discounts.

Banks generally would rather hold on to assets they believe have more inherent value, avoiding selling them at a low point in the market. Many mortgage securities are valued at less than half their original price.

"Bankers see it as a win-win," said Tanya Wheeless, chief executive of the Arizona Bankers Association, which has urged the FDIC to let banks buy their own assets through PPIP.

U.S. banks held about $4.7 trillion in commercial and residential mortgages of the type that banks are lobbying to buy as of the end of the third quarter of 2008, according to Federal Reserve data. PPIP is designed in part to mitigate $600 billion of potential losses through the end of 2010 tied to toxic assets at the nation's 19 largest banks, according to the Fed's stress tests.

Mr. Nelson proposed to the FDIC that banks be allowed to control as much as half the capital in a buyers' group. In some cases, he wrote, "the selling bank should be able to participate as the only private-sector equity investor."

The California Bankers Association said in a letter that the FDIC's supervision of the asset-pricing process "should alleviate concerns about the inability to effect arm's length transactions between a bank and its affiliate that purchases through a public-private investment fund."

Irene Esteves, the chief financial officer at Regions Financial Corp., which has been lobbying to buy assets through PPIP, included a reference to gobbling up loans under the heading "Conflict of Interest" in a letter to the FDIC. A spokesman for the Birmingham, Ala., bank declined to comment.

Towne Bank of Arizona plans to sell some of its soured real-estate loans into PPIP and wants to profit from the program. "We think it would be attractive to our shareholders to be able to share in whatever profits there are from the venture," said CEO Patrick Patrick.



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