FDIC Legacy Loan Program Delayed, Being Reassessed

The Federal Deposit Insurance Corporation announced on Wednesday, June 3, 2009, that development of the Legacy Loan Program will continue, but will be delayed. The program contemplates Public Private Investment Partnerships (“PPIPs”) that will buy bank distressed loans. The planned sales of bank loans, scheduled to take place in June as a pilot of the program, will be postponed. However, a test of the leveraged funding mechanism of the program is now planned for July, in which receivership assets will be sold. Chairperson Sheila Bair indicated that there will be an assessment of the “magnitude and timing of troubled asset sales.”

The announcement followed remarks earlier in the week by Treasury Secretary Timothy Geithner and Chairperson Bair to the effect that the successful stock sales by several of the major banks may have raised a question for banks about the need for this program in order to cleanse their balance sheets. Acting OTS Director John Bowman, however, commented that the availability of such a program continued to be a “critical” potential resource for any recovery.

Since the announcement of the Legacy Loan Program in March, the FDIC has received over 400 comments on the program. The now-delayed June pilot sales would have reflected the FDIC’s position on several controversial issues raised by the initial outline of the program. One concern of the private sector potential participants, that the “rules of engagement” might be changed by the regulators or Congress, has already proven true. Congress included requirements for special conflict and reporting rules applicable to PPIPs in the recently enacted Helping Families Save Their Homes Act of 2009.