Banks Put Off Plans to Sell Toxic Assets
Friday, June 5, 2009
The rush of capital into the banking industry over the past month is allowing firms to postpone the painful process of selling devalued mortgages and other troubled assets, a step many financial experts still consider necessary to fully revive lending.
The Federal Deposit Insurance Corp. said Wednesday that it would suspend indefinitely the launch of a program to finance investor purchases of banks' troubled loans because few companies were interested in selling. A related Treasury Department program to finance purchases of mortgage-related securities remains on the drawing board months after both were announced with fanfare.
The FDIC decision marked a victory for the banking industry, which has argued that such a program would transfer profit from banks to investors at public expense. It also showed the limits of the government's ability to impose its will on the banks. Regulators generally cannot compel firms to sell assets, and the inflow of private capital has undermined the argument that the banks must take urgent steps to get healthy.
But FDIC Chairman Sheila C. Bair said yesterday that the best course for banks, and for the broader economy, remained a combination of raising new capital and shedding old problems. She said that the FDIC would continue to prepare to help banks sell assets.
"It is preferable to get them to sell assets in combination with raising capital in order to get the banks to be in a better position to start lending again," Bair said in an interview. "Getting them off the books is a cleaner posture for the banks."
Fifty financial companies raised almost $50 billion from private investors in May, more than in the previous six months combined, according to analysts at investment bank Keefe, Bruyette and Woods.
The surprising success defied widespread predictions, including by senior government officials, that investors would be scared away by the unpredictable magnitude of eventual losses on troubled assets. It has also dramatically reduced the need for additional federal investments in the largest banks. The 10 companies identified by federal stress tests as needing deeper reserves against losses must submit plans to the government next week, but it is likely that only two, Citigroup and GMAC, will require additional government aid.
Some administration officials were concerned that launching the FDIC program could slow this momentum. Many loans are held at their original value because banks intended to keep the loans until repaid in full, but investors would only buy at much lower prices reflecting the increased risk of default. That would force banks to report large losses.
Some proponents of Bair's approach point out that there is a disconnect between the interests of individual banks and the health of the broader economy. They note that selling troubled assets, even at a loss, would clear room for new lending.
"You can't argue with the fact that each of these dollars that flows into the banking system is one less dollar the government has to come up with, but that doesn't mean the problem is over," said Daniel Alpert, managing director of Westwood Capital, who had expressed interest in buying loans through the FDIC program.
Banks, however, say that they are better equipped to sell troubled loans at the best possible prices.
Regions Financial, a major southeastern bank based in Alabama, created a special division last fall to sell troubled real estate loans. The company assigned three of its best salespeople to find buyers, and created a Web site where investors could view details about the loans. The division has sold 328 loans worth a total of $334 million, and executives say the prices are 15 to 20 percent higher than the company has realized by selling loans through third parties.
Tom Neely, the executive overseeing the program, said the company sells loans to investors interested in the underlying property, rather than those seeking a quick resale. He said he was concerned that the government program would attract the latter group, preventing banks from getting the best possible prices.
"The buyers that we want are going to use the property and so that brings a little bit of a better price," Neely said.
There are signs that investors are increasingly interested in buying troubled loans without government financing. DebtX, an online auction site for troubled loans, has approved several thousand new bidders this year. And a growing number of investors are creating funds to buy troubled assets. PennyMac Mortgage Investment Trust, started by former executives of Countrywide Financial, announced plans last week to raise up to $750 million from investors.
Jefferson Harralson, a financial analyst at Keefe, Bruyette and Woods, said the increased interest was obviating the need for the FDIC program.
"The government program wasn't to prop up asset values, it was to help finance buyers," he said. "And now that you're seeing deeper bidder pools, that are getting financing on their own, the financing is not as needed."