At long last the federal government is putting together a program to take so-called toxic assets off the balance sheets of our nation’s banks and inject much-needed cash into the financial system for new loans. The Legacy Loans Program will pair private investors with the government to purchase pools of assets with financing provided by the government at advantageous interest rates and terms. And it could be a really good deal for everyone if we did it right.
“The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets,” FDIC Chairman Sheila C. Bair wrote in a press release. True enough. This plan allows private forces to value the toxic portfolios and provides them with the financing needed to purchase them. Sounds good.
But then her comments become a little problematic: “The Legacy Loans Program, while providing substantial upside potential to private investors and the government, will also clear these troubled assets from banks balance sheets — enabling them to lend and restore economic growth.” So wait a minute — what happens if a private investor is able to generate the “substantial upside potential” (which means they can make a lot of money) promised by the program? Can they keep the money?
Or will the outraged citizenry take arms, led by their political leaders, and demand that the investors donate their ill-gotten gain back to the public coffers? Will Barney Frank say that we the people own 85% of the public-private partnership and therefore we can take the profits away from our private partners or significantly reduce their take? I would have said “of course not” to all of this had I not seen the circus atmosphere surrounding the recent AIG retention bonus fiasco. Since witnessing the obscene Senate hearings and watching politicians pound sound bites into our ears indicating their faux outrage on anyone profiting from this process, I cannot imagine anyone being comfortable about entering into a partnership with the government right now.
So it sounds like a good program and it could be one. The trick will be getting private investors to trust their public sector partners. And given recent events, that is going to have to be one heck of a sales job.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
