Questions Delay Sale Of Toxic Bank Assets
Thursday, May 28, 2009
A top banking regulator said yesterday that a federal initiative to relieve financial firms of troubled assets is being held up while the Treasury Department drafts rules to guard against fraud in the program and audit its investors.
Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., said the Treasury is still trying to address the concerns of possible participants in the program, which would provide up to $1 trillion in financing to help hedge funds and other investors buy bad loans and securities from banks.
Federal officials say the initiative, part of the Troubled Assets Relief Program, is vital because it would allow banks to rebuild their balance sheets and increase lending, in turn stimulating the economy.
A new law requires the Treasury to issue rules governing the initiative and gives $15 million to the TARP special inspector general to audit investors.
Some potential investors told the Treasury they are concerned that the legislation could require them to divulge private information about their operations, according to a person familiar with discussions about the rules.
"There continues to be discomfort about Congress's views of this program," Bair said at a news conference.
A Treasury spokesman didn't respond to requests for comment.
Bair said the FDIC also has to clarify some questions about the program before it can begin. She said banks would not be allowed to bid on assets they are selling themselves, but that her agency hasn't determined whether they would be allowed to bid on other banks' assets.
Meanwhile, the FDIC reported yesterday that its insurance fund, which guarantees bank deposits, is dwindling. In the first three months of the year, the fund declined 24 percent, to $13 billion, amid rising bank failures.
The FDIC has taken further hits since March 31, most recently with the collapse last week of Florida-based BankUnited, which cost the agency $4.9 billion.
Overall, 36 banks have failed this year. The FDIC said the number of banks at risk of failing rose from 252 to 305 in the first quarter. The agency doesn't name these so-called problem banks.
Bair said she expects the deposit insurance fund to continue to shrink through the rest of the year but remain in the black. That would reduce the need for the agency to tap an emergency Treasury line of credit.
The money in the insurance fund comes from fees paid by banks.
The FDIC has already set aside $28 billion to cover expected losses over the next year. It estimates earning $8 billion in industry fees through June 30, including a special $5.6 billion assessment approved last week.
The FDIC said banks made a profit of $7.6 billion in the first quarter, a reversal of the $36.9 billion loss in the fourth quarter of 2008. But the profit was well below the $19.3 billion earned in the first quarter of 2008.
The FDIC said loans on commercial real estate represent a major threat to banks. "Troubled loans continue to accumulate and . . . are weighing heavily on the industry's performance," Bair said.