Thursday, March 26, 2009

Bair Is Open to Banks Profiting on Problem Loans

Federal Deposit Insurance Corp. Chairman Sheila Bair said Thursday she would be open to letting banks see some of the profits if they dump problem loans that ultimately recover some value.

The comments, made in a conference call with bankers Thursday, address a key industry concern with the government's plan for ridding banks of toxic assets.

While bankers understand unloading troubled loans will help clean up their books, taking bargain-basement prices could cause immediate pain and transfer the prospect of any future recovery to the buyers.

The Treasury Department's Public-Private Investment Program involves setting up investment funds to buy loans from banks. Ms. Bair said banks might be able to take an equity stake in those funds as partial payment for their loans, which would give them a payoff if the loans ultimately rise in value and would provide bankers with more incentive to sell troubled assets.

"We'd be open to comments on that," Ms. Bair said.

Domestic U.S. banks held loans valued at $6.5 trillion on their balance sheet last month, almost 60% of which are tied to consumer and commercial real estate. Those real-estate loans are causing the biggest headache and are likely the ones banks will hope to sell.

The problem is few investors will be willing to pay anything close to face value for such assets. If the price for impaired loans is below the face value of the loans minus the provision banks took to reserve for potential losses on the loans, banks' capital could suffer.

The FDIC's disposal of assets seized from failed banks gives some indication of the wide range of values the market is placing on bad loans. Last year, the FDIC auctioned off $38.6 million of real-estate loans that were originally valued at $58.4 million.

Loans made by banks in hard-hit states like California, Arizona, Michigan and Florida are valued the least, said Kingsley Greenland, chief executive of DebtX, an auctioning firm under contract with the government agency.

Top-tier, income-generating properties sell for as much as 90 cents on the dollar in regular FDIC auctions, Mr. Greenland said.

At the other end of the spectrum, COF Capital Partners LLC of Rocklin, Calif., paid $1.78 million, or only four cents on the dollar, for a portfolio of eight loans with a face value of $44.6 million, according to the FDIC's sale database.

The Treasury program aims to get investors to bid on the high side by letting them buy assets with lots of government-backed borrowed money and little cash down.

But observers said bankers may still hesitate to sell.

Some of the troubled loans still generate cash flow, and bankers might fear losing out on big gains in the loans when the economy improves.

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