On June 3, 2009, the FDIC announced a postponement of the Legacy Loans Program component of the Public Private Investment Partnership for open banks to sell loans. Formally, development of the Legacy Loans Program will continue, but the previously planned pilot sale of assets by open banks will be postponed. Accordingly, the government is once again exploring whether the purchase of troubled assets should be part of the Troubled Asset Relief Program. The federal government appears to have now completed a 540 degree rotation under the Troubled Asset Relief Program. Observers are keen to determine whether the government will land an unprecedented 720, possibly earning an X Games gold medal in the process.
Chairman Bair explained, “Banks have been able to raise capital without having to sell bad assets through the Legacy Loans Program, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.”
As a next step, the FDIC will test the funding mechanism contemplated by the Legacy Loans Program in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- extended the $250,000 deposit insurance limit through December 31, 2013;
- extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
- increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
- increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
- removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments. The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.
This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee. The Transaction Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.
On Thursday, April 9, 2009, the FDIC held its second telephone conference call to discuss the PPIP Legacy Loans Program. The first such call (audio replay|transcript) was primarily for bankers, while today’s call was primarily for investors. A transcript of the investor call is also available on the FDIC site.
Investors wishing to participate in the Legacy Loans Program should complete the preliminary application. The Legacy Loans Program Summary, Fact Sheet, and FAQ are also available.
At the outset, the FDIC repeatedly advised that this call was for information and discussion purposes only and specifically “not for attribution” to the FDIC.
The FDIC Chairman, Sheila Bair, presented very brief opening remarks, and gave certain background information. She reminded callers that on March 23, 2009, Mr. Geitner announced the Legacy Loans Program, to be administered by the FDIC. The FDIC’s Proposed Term Sheet regarding the Legacy Loans Program is currently on the FDIC’s website, where the FDIC is currently still seeking comment and input, until tomorrow, April 10, 2009. The Term Sheet provides the FDIC’s 17 initial questions. Ms. Bair confirmed that the Legacy Loans Program is intended for all banks, large and small and that today’s call focuses on the investor perspective.
On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”). The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks. PPIP is part of the broader “Financial Stability Plan” introduced by President Obama. The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit. PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.
Legacy Loans Program
The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”). The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets. The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks. Each PPIF will be comprised of a joint venture between private investors and the Treasury. Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved. However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.
Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors. U.S. banks of all sizes will be eligible to participate in the program. U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell. Eligible assets are required to be predominately situated in the United States. The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties. The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio. The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.