Magazine article American Banker

Toxic-Loan Plan Test on Hold with Few Participating

Magazine article American Banker

Toxic-Loan Plan Test on Hold with Few Participating

Article excerpt

Byline: Joe Adler

WASHINGTON - A test run of the government's bad-loan removal plan has been shelved as officials struggle to attract both sellers and buyers.

The Federal Deposit Insurance Corp. had planned the test of its Legacy Loans Program for June, but a host of issues have arisen, including congressional restrictions on participants and the persistent challenge of pricing loans to be disposed through government auctions. Moreover, a consensus is growing that as bank capital positions improve and the values of some written-down assets bounce back, the need for the program has subsided.

As a result, sources say, the FDIC has put the test on hold and the program could be scrapped.

"It doesn't feel like a priority at this point," said an industry representative who asked not to be identified. "I'm not sensing as much of a need on the part of the banking industry for this kind of a program. A lot of the banks have already written down all of these assets."

The toxic-loan plan is one half of the Treasury Department's Public-Private Investment Program, which officials unveiled in March. (The other half, the Legacy Securities Program aimed at removing illiquid asset-backed securities from financial institutions, is still on track to launch as early as July.)

The loan program was supposed to combine Treasury and private-equity funds with debt backed by the FDIC to establish investment funds that would buy troubled bank loans at big discounts. It echoed the Bush administration's original goal for the $700 billion Troubled Asset Relief Program. But that plan, too, was eventually abandoned, because the government could not figure out how to price the loans.

"Everybody you talk to at the agencies says it's dubious at best that a viable program can be put together," said William Isaac, a former FDIC chairman. …

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