[A-List] Banksters Playing Both Sides

[Bill Totten]

Banks Aiming to Play Both Sides of Coin

Industry Lobbies FDIC to Let Some [banks] Buy Toxic Assets With Taypayer
Aid From Own Loan Books

by David Enrich, Liz Rappaport and Jenny Strasburg

Wall Street Journal (May 27 2009)


Some banks are prodding the government to let them use public money to
help buy troubled assets from the banks themselves.

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].

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, 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.

The New York trade group represents ten of the world's largest banks,
including Bank of America Corporation, Citigroup Incorporated and Wells
Fargo & Company. Those banks are seen as likely sellers of assets using
PPIP. Officials at the banks declined to comment.

"It's an issue that's been raised and an issue we're aware will need
specific guidelines", said an FDIC spokesman, adding that the agency
still is working on the final structure of its program and plans to
launch a $1 billion pilot program this summer, which likely won't
include an infusion from the Treasury.

Some critics see the proposal as an example of banks trying to profit
through financial engineering at taxpayer expense, because the
government would subsidize the asset purchases.

"To allow the government to finance an off-balance-sheet maneuver that
claims to shift risk off the parent firm's books but really doesn't
offload it is highly problematic", said Arthur Levitt, a former
Securities and Exchange Commission chairman who is an adviser to
private-equity firm Carlyle Group LLC.

"The notion of banks doing this is incongruent with the original purpose
of the PPIP and wrought with major conflicts", said Thomas Priore,
president of ICP Capital, a New York fixed-income investment firm
overseeing about $16 billion in assets.

One risk is that certain hard-to-value assets might not be fairly priced
if banks are essentially negotiating with themselves. Inflated prices
could result in the government overpaying. Recipients of taxpayer-funded
capital infusions under the Troubled Asset Relief Program also could use
those funds to buy their own loans.

"Sensible restrictions should be placed on banks, especially those that
have received government capital, from investing their own balance
sheets in a backdoor effort to reacquire what could be their own assets
with an enormous amount of federally guaranteed leverage", said Daniel
Alpert, managing director at Westwood Capital LLC, an investment bank.

Even supporters of letting banks buy their own loans said it could be a
tough sell.

"A bank bidding on its own assets really has the potential to look awful
in the public's mind", said Mark J Tenhundfeld, an American Bankers
Association lobbyist. Some bankers said the concerns can be addressed
through strong oversight by the government and outsiders.

The banking industry's lobbying is meant to overcome a hurdle facing
PPIP: unwillingness by banks to sell assets at steep discounts.

Banks generally would rather hold on to assets they believe have more
inherent value, avoiding selling them at a low point in the market. Many
mortgage securities are valued at less than half their original price.

"Bankers see it as a win-win", said Tanya Wheeless, chief executive of
the Arizona Bankers Association, which has urged the FDIC to let banks
buy their own assets through PPIP.

US banks held about $4.7 trillion in commercial and residential
mortgages of the type that banks are lobbying to buy as of the end of
the third quarter of 2008, according to Federal Reserve data. PPIP is
designed in part to mitigate $600 billion of potential losses through
the end of 2010 tied to toxic assets at the nation's nineteen largest
banks, according to the Fed's stress tests.

Mr Nelson proposed to the FDIC that banks be allowed to control as much
as half the capital in a buyers' group. In some cases, he wrote, "the
selling bank should be able to participate as the only private-sector
equity investor."

The California Bankers Association said in a letter that the FDIC's
supervision of the asset-pricing process "should alleviate concerns
about the inability to effect arm's length transactions between a bank
and its affiliate that purchases through a public-private investment fund."

Irene Esteves, the chief financial officer at Regions Financial
Corporation, which has been lobbying to buy assets through PPIP,
included a reference to gobbling up loans under the heading "Conflict of
Interest" in a letter to the FDIC. A spokesman for the Birmingham,
Alabama, bank declined to comment.

Towne Bank of Arizona plans to sell some of its soured real-estate loans
into PPIP and wants to profit from the program. "We think it would be
attractive to our shareholders to be able to share in whatever profits
there are from the venture", said CEO Patrick Patrick.

Damian Paletta contributed to this article.

http://online.wsj.com/article/SB124338836675757049.html


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