Thursday, May 28, 2009

Legacy Loans Program: Being Gamed Or Avoided?

From Marginal Revolution:

Is the Geithner plan dying a natural death?

Via Ezra Klein, we learn from the WSJ:

A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.

Ezra comments:

...the reasons appear to be twofold. First, few investors or banks want to work with the government. And second -- and maybe more importantly -- few investors and banks now think they'll have to. The banks, in particular, are apparently enthused by their ability to raise private capital, and now think they can wait out the market turmoil and sell their toxic assets in a few years, when they'll be worth more money.

And then:

Recently, I asked an administration official which government program we'd remember as making the most difference in averting catastrophe. Where will the history books place the credit?

"It'll be the Federal Reserve," he replied. "It'll be their decision to increase the size of their balance sheet from whatever it was before the crisis to whatever it is now."

Posted by Tyler Cowen"


So let's see:

"The WSJ reports:

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( NB DON ), 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."


"U.S. plan to buy banks' bad loans stalls: report
Wed May 27, 2009 10:39pm EDT

NEW YORK (Reuters) - A U.S. government plan to rid banks of bad loans is stalling and may soon be put on hold, the Wall Street Journal reported on Wednesday, citing people familiar with the matter.

The Legacy Loans Program ( NB DON ), which is being crafted by the Federal Deposit Insurance Corp, is part of the $1 trillion Public Private Investment Program the government announced in March to encourage banks to sell securities and loans weighing on their balance sheets to willing investors.

Prospective buyers and sellers have expressed reluctance to the FDIC about participating for fear the program's rules will change in a political atmosphere hostile to Wall Street, the Journal reported. It also said that some banks that might have sold troubled loans into the program earlier in the year have become less eager as they regained a sense of stability.

FDIC spokesmen were not immediately available for comment."

So, the banks are lobbying for something that they have no intention of taking part in. Makes sense.

Posted by: Don the libertarian Democrat "

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