July 2009

Federal Programs for Disposal of Toxic Financial Assets

"One Step Forward...One Step Back"

White and Williams LLP attorneys practicing in real estate finance, securities, workouts and financial restructuring recently formed a Legacy Asset Task Force to inform and assist companies and investors interested in opportunities presented by the federal government's Public-Private Investment Program (PPIP).

This follow up provides you with the latest information on the federal programs for disposal of toxic financial assets. We invite you to contact us with questions regarding recent developments since these programs are still being developed and additional information is becoming available frequently.

General

The Treasury Department, the Federal Reserve and the FDIC have previously laid out the basic framework for two programs designed to enable financial institutions to dispose of certain toxic (now legacy) assets. The Legacy Securities Program is intended to leverage equity capital from the Treasury Department and the private sector, with debt financing from the Treasury Department and the Federal Reserve, to enable investment funds run by approved fund managers to purchase from financial institutions "legacy" securities consisting of certain types of mortgaged-back securities. The Legacy Loan Program is intended to combine debt financing supported by an FDIC guarantee with equity capital from the Treasury Department and the private sector to enable investment funds to purchase "legacy" loans from banks and savings associations.

View an outline of the two programs.

One Step Forward

In a joint statement issued on July 8, 2009, the Treasury Department, the Federal Reserve and the FDIC announced the list of nine pre-qualified fund managers who are eligible to participate in the initial round of the Legacy Securities Program. As part of this statement, the Treasury Department published a summary of conflict of interest rules and ethical guidelines for the program along with a form letter of interest and form summaries of indicative terms of the Treasury Department's equity investment and debt financing terms. These actions indicate that this program continues to move forward with the goal of providing a market for "legacy" securities, which should allow financial institutions to dispose of "legacy" securities at a market price. This should free up the financial institutions' capital for new loans, and is intended to provide a more realistic valuation mechanism for institutions that continue hold these securities.

One Step Back

The Legacy Loan Program has faltered. On June 3, 2009, the FDIC announced it was postponing the initial sale of "legacy" loans under this program and indicated that the program was under review for renewal in a different form. This was due, in part, to widespread reluctance among the banking community to participate in this program as currently structured. The FDIC indicated that one of the reasons for the lack of interest is that banks have been able to raise additional capital without having to sell their "legacy" loans. Others have argued that the reluctance of the banking community stemmed from a desire by the banks to avoid the losses they would have to recognize upon such sales and a concern over future additional rules and regulations governing such sales.

There had been some inquiries regarding whether the program would allow banks to buy their own "legacy" loans with the government backed financing. This was rejected.

Although the program as originally structured is under review, the FDIC is planning to test the leveraged funding mechanisms of the program through a sale of receivership assets in July 2009. This leveraged financing is anticipated to involve concepts developed by the Resolution Trust Corporation for asset sales in the 1990s.

For more information, please contact our Legacy Asset Task Force representatives, Anthony Krol and Joan Rosoff.