The following are answers to some of the questions raised in the FDIC’s call for comments regarding the Legacy Loan Program and Public-Private Investment Program (PPIP).
Q: Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP? The program should focus on real-estate related assets including loans and REO properties. Why?
A: Because the value of the underlying assets is more easily quantified and more desirable to mainstream investors. Portfolios that include a variety of product type (say, residential loans and commercial property loans), pools that include assets in diverse markets (such as home loans in California and Texas), or portfolios of non-complementary assets (like hotel loans and restaurant properties) would likely be heavily discounted and the pooling of such assets should be avoided. However, pools that include properties of similar quality and asset class (i.e. residential subdivisions/land developments in the Southwest, or a grouping of hotel/motel loans in primary U.S. market areas) that require uniform reporting, comparable management expertise, and similar investment strategies should attract a significant premium.
Q: Should the initial investors be permitted to pledge, sell or transfer their interests in the PPIF? If so, how should the FDIC ensure that subsequent investors meet the program’s criteria for investors? Is there any reason that investors’ identities should not be made publicly available? No, the investors’ identities should be made public because the plan is essentially being funded by the U.S. taxpayers?
A: The initial investors should be able to pledge, sell or transfer their interests in the PPIF but the the FDIC’s guarantee should not extend to subsequent investors. Any sale of an investor’s interest should result in the release of liability by the FDIC.
Q: What is the appropriate percentage of government equity participation which will maximize returns for taxpayers while assuring integrity in the pricing by private investors?
How would a higher investment percentage on the part of the government impact private investment in PPIFs? Should the amount of the government’s investment depend on the
type of portfolio?
A: An 50-50 equity split, as currently planned, appears to be a reasonable arrangement. Under this scenario (and assuming an 86% debt ratio), an investor could
control a $100M portfolio for a modest $7M capital investment. A higher percentage investment percentage on the part of the government would result in unneccessary investor speculation and a significantly higher default rate on these loans/assets.
Q: How can the FDIC best encourage a broad and diverse range of investment participation? How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the PPIF?
A: By “investment participation”, I assume you mean bank participation in the program (not investor participation in the purchase of the asset pools). Consequently, I would recommend structuring pools of “like assets” (home loans pooled together, income-producing properties together, land together, self liquidating assets i.e. residential subdivisions together).
