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Home > Asset Sales > Legacy Loans Program > Transcript of the Press and Technical Briefing Conference Call on Legacy Loans Program

Transcript of the Conference Call for Bankers

CONFERENCE CALL OPERATOR: Good afternoon and welcome and thank you for standing by. At this time all participants are in a listen-only mode. During the question-and-answer session, please press star 1 on your touch-tone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr. Andrew Gray. Sir, you may begin.

MR. GRAY: Good afternoon. You've reached the FDIC's conference call for bankers on the Legacy Loans Program. I should mention that this is a call for industry and is not meant for the media. If there are representatives of the press on this call, there should be no attribution or use of this information.

In a moment, we'll begin the call with opening remarks from FDIC Chairman Sheila Bair. Then the FDIC's Chief Operating Officer John Bovenzi will provide an overview of the program. After that, senior FDIC staff will address questions that have been submitted beforehand through the industry trade groups. We will then open it up to Q & A. This entire call should run approximately one hour.

With those details out of the way, I will turn it over to FDIC Chairman Bair.

CHAIRMAN BAIR: Thank you, Andrew. And welcome, everyone, for joining us today.

As Andrew indicated, on Monday we joined with Treasury and the Fed in announcing some asset purchase programs. Our piece of this is the Legacy Loans Program. I assume most of you are already generally familiar with the outline as it was released on Monday.

The goal is to cleanse bank balance sheets and thaw credit markets. And it's very important to us, and I want to re-emphasize that all banks will be able to participate in this program, large and small. Our initial focus, we think, will be on the higher risk assets, particularly the mortgages and commercial real estate legacy loans, but we'd like some comment on asset categories and where we should put our focus first. And the pricing and the investment and the management will be based on the government and private sector partnership, with the government and private investors providing the capital -- the equity capital, and the FDIC assisting with financing through guaranteeing PPIF debt or perhaps through notes either publicly issued or notes going back to the selling banks. So it's another area where we'd like some comment.

The investors -- we want to reach a broad range of investors: individuals, mutual funds, pension plans, insurance companies, and other long-term investors in particular. And we do appreciate input on how to ensure that the investor participation is a broad as possible.

And we do think this program has a good chance of succeeding. We're going to be doing it on a very measured approach, a very transparent approach, but we think it is a good structure, a good plan, and we are optimistic for successful results.

Again, we do want to be very transparent with this program, which is one of the reasons why we're having this call today. And we are seeking public comment on the program for two weeks. We are putting the questions and the terms sheet on our Web site today. So, we are looking for a two-week comment period, and we'd like to get the program up and running fairly quickly. So, we'd ask all of you to put your thinking caps on now and give your best thoughts and comments to us within this two-week time period so we can finalize the structure and proceed with the first bid.

There are a number of key areas where we'd like comment. And, again, just go to our Web site for some of the questions, but in particular we're interested on the equity distribution, what types of assets should qualify and the assets should be managed. And I thank both the ABA and the ICBA for already giving us some excellent input in questions, many of which the staff will be addressing this morning.

So, we don't have all the answers right now, and that's why we want to hear from you. But our senior FDIC staff have joined me on this call, and we'll be responding to your written as well as your oral questions. And I think you know the stakes are very high with this. We need this program to work, and we need your help and input to make it work and get it right.

So, with that, I would like to turn the program now over to John Bovenzi, our Chief Operating Officer, who will give a more detailed overview of the program.

MR. BOVENZI: Thank you, Chairman Bair. The Treasury and the FDIC are establishing the Legacy Loans Program to remove troubled assets from banks. This program is necessary because of the uncertainty about the value of these assets. It makes it difficult for banks to raise capital and secure stable funding to support lending to households and businesses.

All FDIC-insured depository institutions will be eligible to participate in this program, and while the idea of having the government purchase assets from banks has been proposed before, the problem of determining a fair price for the assets has prevented the idea from moving forward.

The concern has been that the price set by the government might result in overpaying for the assets. To address this concern, the Treasury will join with private investors to purchase these assets. This combination uses the expertise of the private sector and discipline from the financial markets to determine market-based price for assets that have been hard to value.

The vehicle for purchasing assets from a bank will be public-private investment funds. Private investors will bid for the opportunity to contribute up to 50 percent equity for the private -- public-private investment fund. The winning bid for the equity share will set the implied value of the equity share held by the Treasury. With financing guaranteed by the FDIC, this will define the overall price offered to the selling bank.

Because the government will be in partnership with private investors, the government will share in any profits. If private parties profit from their investment, as they expect to and we expect them to, the Treasury will also. At the same time, the Treasury will only suffer losses if the private investors do.

Credit markets have not functioned well recently because of the lack of financing for certain assets. To address this, PPIF, Public-Private Investment Fund, will be able to issue FDIC-guaranteed debt. For providing this guarantee, the FDIC will be paid a fee, a portion of which will be allocated to the Deposit Insurance Fund.

The FDIC will be protected against losses by the equity in the pool, newly established value of the pool's assets, and the fees collected. And we'll spend a little bit of time talking about that as we proceed here.

This package -- program will be coordinated with the other components of the financial recovery package to clean up bank balance sheets so banks can once again provide the lending to further the recovery of the U.S. economy. And, as Chairman Bair has said, we are seeking public comment on the critical aspects of the program. So, there are a lot of details to this program that we want to get your input on before we finalize the specific details of how to move forward. Yet, at the same time, we want to move in an expeditious manner. So, we are having this call today to get started. And we would anticipate having other calls like this as we move forward. It's a format that we used in setting up the Temporary Liquidity Guarantee Program. It worked well for us in getting a brand-new program that was fairly complicated off and running quickly by getting as much input as we could from all the interested and relevant parties.

So, we encourage you to comment on the questions that we've put up on our Web site. We appreciate you being here today as part of this. We did ask that some of the trade associations for questions that they might like to have answered.

What I'd like to do at this point is spend a few minutes having our senior staff members talk about them a little bit, not to go through every single question in detail, but there are certain categories of questions, and they can summarize what those are and give a response. And if we spend a few minutes doing that, then we can open it up for your specific questions.

So, the first area of questions that we received related to what type of assets may be eligible for the program and what types of loans. And I'm going to turn it over to Dan Frye from our Division of Supervision and Consumer Protection to talk about that little bit.

MR. FRYE: Thanks, John. Good afternoon, everybody.

In looking at this -- and clearly this is an issue that we are reviewing here at the FDIC, what assets would be eligible. As the Chairman said in her remarks when she opened this call, our initial focus would be on residential or commercial real estate backed credits. We think that's where the bulk of the problem is, and it's probably easier to pull something together out of those asset classes. But we have asked for your input because, as we go forward, if this program is as successful as we hope it to be, we would start look at other portfolios, such as consumer C&I, perhaps even pushing it into real estate owned, things of that nature.

So, those things still have to be fleshed out, but right now the focus would be primarily on residential and commercial real estate loans.

We will have an internal process here to come up with a list, if you will. We still have to go and discuss with Treasury. They will be a partner in these deals, and there's certain limitations they may have in terms of eligible assets and things of that nature. So, once we get our discussions finalized with them, we would be able to submit publicly what assets we would look at.

Along the same lines as what institutions are eligible, as the Chairman and John indicated, this program we hope to be open to all banks -- banks of all sizes. The challenge to us will be to come up with a structure that will allow community banks to participate without having their potential upside eaten away by expenses. And we have a number of groups working hard on that problem as well.

So, we will have a process where banks will work with their primary federal regulator -- I think that's the initial phase -- to identify some assets, take a look at what you look like after the sale, based on your expectations for sale price. And then we'll go from there. But right now we don't have any specific limitations on institutions to participate.

MR. BOVENZI: Thank you, Dan.

Another area that we received a number of questions relates to the sales and marketing process and sizes of pools, how many pools there may be, et cetera. And I'm going to ask Jim Wigand, from our Division of Resolutions and Receiverships, to paraphrase some of those and respond to them.

MR. WIGAND: Yes, thank you, John. We received a number of questions basically falling into three categories. Dan addressed the questions about pool eligibility. I just may want to add to that, that with respect to the sizing of the pools and how often we would be making offerings -- I mean, these are issues that we're soliciting comment on. And in our request for comment, we are looking for industry input to assist us in making that type of determination.

We also received questions with respect to the type of process that would be involved. Certain facets of this are going to be fairly clear. One is that, of course, we do plan using a competitive auction process; however, we're soliciting comment as to what type of auction would be facilitate the broadest investor participation. We also anticipate using independent valuations to assist the FDIC in assessing its risk associated with the provision of the guarantee on the financing of this. And we also, of course, will be going through a due diligence process to both assist the FDIC as well as private investors in determining the risk associated with the underlying assets.

Another set of questions deals with what I've characterized as the consideration the bank will be receiving for its contributions to the program. We are soliciting comment with respect to whether or not it would be preferable for the selling bank to basically just receive a note or whether or not it should receive cash, and if so, what are the advantages and disadvantages of structure the program so that debt could be issued publicly, which would allow, obviously, a mechanism for providing cash as the consideration for the transaction.

And those are basically what I characterize as the three general areas associated with the sales and marketing process.

MR. BOVENZI: Thank you, Jim. The third area where we received a number of questions relates to the cost of the program, who is going to pay for the program, and what kind of risk the program may pose to the FDIC. And I'm going to ask Art Murton, our Director of our Division of Insurance and Research, to speak to those questions.

MR. MURTON: Thanks, John. A question we've been asked is, is this program exposing the DIF, the Deposit Insurance Fund, to risks? And, obviously, the exposure here in providing this guarantee is that the FDIC would have to perform on the guarantee for a given pool, and that would occur if it turns out that the equity portion of the pool is exhausted or, put differently, if the value of the assets that realize is less than the debt that was issued out of that pool.

And the question is, what are our protections against that happening in any given pool? And I think that starts with the purchase price. We're hoping that the interest of the private investors will result in a price that gives us comfort that we won't expect to take losses there, as will the equity portion of the pool. And we will be adjusting that based on the characteristics and the riskiness of the pool.

If there were -- if those two things did not turn out to be protection for a given pool and we suffered losses, we would pay for those losses out of the pool of fees that we have collected under the program. And we expect to be risk-based pricing those rules, and we're going to seek comment on how we might do that.

If, when the program were all said and done, the total costs under program exceeded the total amount of fees that we had collected, then the FDIC would recover that through a special assessment on the industry. This is being done under the Systemic Risk Exception, and the statute calls for that.

So, that's the nature of the risk and the exposure. We don't expect to take losses. We expect this program will result in a positive return to the FDIC.

The question has also been raised, why should banks that aren't participating in this program be exposed to these risks? And one of the things that I would say is that in the first case, the entire industry benefits if this program is successful. What we're trying to do is get the industry in a healthier shape, and if we are able to do that through this program and other programs, it will result in fewer failures and fewer costs to the FDIC, to the Deposit Insurance Fund. And that's what we're hoping comes from this.

We are also going to take a portion of the TLGP fees and deposit them into the DIF so there will be an immediate and direct benefit to the Deposit Insurance Fund.

And then the special assessment, if it is invoked, will be based on liabilities, as the law calls for, and that essentially tilts the balance more toward the larger institutions that perhaps may be beneficiaries of some of these government programs.

And the, finally, when the program is all said and done, we expect that the excess of it would be placed into the DIF.

So, I think those are some of the ways we are thinking about the fairness issues associated with this program.

MR. BOVENZI: Thank you, Art.

I think at this time perhaps it would be best to just open it up for questions from the audience, and we'll respond to those.

CONFERENCE CALL OPERATOR: Thank you. We will now begin the question-and-answer session.

If you would like to ask a question, please release your phone line and record your name and industry you currently work for clearly when prompted. Your name is required to introduce your question. To withdraw your question, press star, then 2. Once again, to ask a question, please press star, then one. One moment, please, for the first question.

Our first question comes from Frank Wicker. Sir, your line is open.

MR. WICKER: Yes, a couple questions: In terms of starting the program, do you have kind of a time range for when you hope to be up and running? I know you said as soon as possible a couple times, but can you give us a sense of, is it a month, is it a couple months?

FDIC STAFF MEMBER: Well, don't -- we're going to wait till the end of the public comments before we try to assess exactly how long that will take us. So, we are anxious to get this program moving as quickly as possible. So, we've put a short time frame on receiving public comments. Those are due by April 10th. And we'll look at those, and then develop the parameters of the program and get started with an initial purchase. And so, we would expect to be moving pretty quickly, but the program is important enough that we want to be very methodical as well. We want to make sure we put it in place correctly to make it successful. So, we're looking to get that input before we set a specific time frame.

MR. WICKER: Okay. And then just one quick question on the auction process: If a pool has assets that are put up for auction and a number of companies or private bidders bid on it and the bank chooses not to take it, not to take the bid, is it your assumption that that will then set price discovery for other similar pools of assets? Thanks.

MR. STORCH: On prices -- this is Bob Storch. I'm Chief Accountant at the FDIC. At least at the outset, that one transaction, if you will, may not be enough information for the market to use as a single data point for price discovery. The other aspects of it would be that the prices that are being bid take into account the favorable financing and so forth that may not be available to other persons who would be interested in buying pools of loans from institutions. So, it would probably be a data point that institutions and others would have to consider, but it may not necessarily be indicative of fair value in and of itself.

MR. WICKER: Okay. Thank you.

CONFERENCE CALL OPERATOR: Our next question comes from Steven Wardman, with JP Morgan. Sir, your line is open.

MR. WARDMAN: Hi. I'm a bank analyst at JP Morgan Asset Management. My question really was, I think back in the eighties Mellon set up some sort of vehicle where it was like a bad bank, and they had some equity interest in the bad bank so they could participate in the upside. And I was just curious -- I don't know what this program or if you had thought about, you know, that element being made available to the banks so they can share in the upside -- because I'm concerned that basically the spread on the loan side is going to be too great because, you know, obviously, the banks have accrual accounting. They hold small amounts of reserves against the loans on the balance sheet. And the bidding in the private market, while helped by the leverage, will also represent a very high required rate of return for investors up front. So, could you just comment on that, please?

CHAIRMAN BAIR: This is Chairman Bair. I mean, healthy banks will be able to participate on the investment side, not obviously on the assets you'd be selling. We want to avoid conflicts. I think there was some discussion about whether selling banks should be able to take part of the payment back as an equity interest in the PPIF, the bidding on -- the selling banks will have assets. So, I think we'd be open to comment on that. And if you think that's something selling banks would be interested in, we'd be open to comment on that.

MR. WARDMAN: Thank you.

CONFERENCE CALL OPERATOR: The next question comes from Jim Sorenson, the Sorenson Group Holdings.

Sir, your line is open.

Mr. Sorenson?

One moment, please.

CONFERENCE CALL OPERATOR: The next question comes Lou Ackers with Adams National Bank.

Sir, your line is open.

MR. ACKERS: Thank you. First of all, I want to thank the FDIC and the Treasury. This is an outstanding program. My question is: I think there's always somewhat of a bid for distressed assets. One of the problems smaller banks face and some of our larger institutions also is, if these loans are bought at a discount, we create a hole in capital. The sale of assets for cash is going to increase liquidity and make, actually, the bank stronger, but due to mark-to-market accounting, it's going to create hole in our capital base.

Is there any thought for any change in the way capital is looked at in terms of putting more emphasis on liquidity, less in capital or anything in mark-to-market, that would make it easier to take advantage of this program?

FDIC STAFF MEMBER: Well, I do think there's a proposal from the FASB that is very important, that would change the way banks recognize other than temporary impairment losses, and Bob Storch can address that. And that may have -- we may have to address our regulatory capital requirements to reflect that change if it goes through. I don't think at this time we have any other regulatory capital changes under our consideration.

CHAIRMAN BAIR: This is Chairman Bair. We do, in our list of questions, ask generally about types of incentives we could provide that would be appropriate. One area might be the risk rating for -- if part of the purchase price is taken back by the selling institution with an FDIC note, the risk rating on that might be something we should look at. Obviously, I assume that these higher risk assets that will be sold, the risk capital charges will be fairly high. So, there will be some trade-off there. So, we're open to that type of thinking, but there is this question specifically about the types of incentives that would be appropriate for selling banks.

FDIC STAFF MEMBER: And just to add to what George French was saying, the proposal from the FASB deals with securities, and this program, at least initially, is going to be focusing on loans. And the help for investment loan portfolios isn't subject to mark-to-market accounting right now, and if you only sold some of your loans out of the Help for Investment portfolio, that wouldn't trigger any change in the accounting per se for the remaining loans in the portfolio. The market indicators of the price, if they are extremely low, that may have some bearing on what the market view of credit quality is, which could affect judgments going forward about loan loss allowances, but there wouldn't be any automatic marking-to-market for the rest of the Help for Investment loan portfolio solely because you sold a pool out of that portfolio.

MR. ACKERS: No, but you would still -- if you took a discount greater than your reserves, you would still have a hole in your capital, still put a hole in your capital.

FDIS STAFF MEMBER: That's right. On the actual sale transaction itself there -- depending on how you are carrying those loans vis-à-vis the sale price, you'd have a loss that would reduce your capital.

MR. ACKER: Thank you very much.

CONFERENCE CALL OPERATOR: Next question comes from Maria Amos, with the Financial Group.

Your line is open. Maria Amos, your line is open

MS. AMOS: Hi. Thank you very much. I understand that all banks are eligible to participate regardless of their size, but I'm curious if there are any banks that would be deemed ineligible just based on the credit quality of a pool or a portfolio that might be deemed to be in too bad a shape, if you will.

FDIC STAFF MEMBER: No, not at this stage. As I mentioned at the outset, we continue to look at eligibility, but the intent of the program is to move these troubled and toxic assets out of the system. So, that on its face would not be an impediment for us to review the process.

MS. AMOS: Okay. Thank you very much.

FDIC STAFF MEMBER: You're welcome.

CONFERENCE CALL OPERATOR: Next question comes from Judy Troyer, with Harris Chicago.

Your line is open.

MS. TROYER: Yes, I'm looking at the Legacy Loans Program that I got off your Web site this morning, and you refer to eligible banks as being any bank of -- let's see -- is organized under the laws of the United States, but then you say that banks that are owned or controlled by a foreign bank or company are not eligible. Can you explain that? Because we are foreign-owned.

MS. McINERNEY: This is Roberta McInerney. I'm Acting General Counsel at the FDIC.


MS. McINERNEY: That's a very good question, and I -- other folks have raised that questions with me, and I've reached out to the Treasury Department to get clarification on that point. There are some restrictions in existing law on foreign bank participation, and Treasury has indicated, for example, for the TARP capital program, that foreign-owned banks, including those chartered in the United States have not been eligible for that program for the Capital Purchase Program, but I'm working with them to get an answer to that question, but I don't know right now.

MS. TROYER: Do you know when we might be able to expect one?

MS. McINERNEY: As soon as we can. I mean, I'm working expeditiously to get an answer to the question. Certainly, it will be part of what we -- the information we make available on the program before it goes -- before we actually begin in.

MS. TROYER: Okay. So, there will be a determination then?


MS. TROYER: Thank you very much.

CONFERENCE CALL OPERATOR: Next question comes from Greg Gilbertine, with M&K Capital Group.

Sir, your line is open.

MR. GILBERTINE: Thank you, ladies and gentlemen. My question is, how come this program is limiting the -- limiting it to FDIC-insured institutions? You know, a lot of those bad debts have been generated from these FDIC-insured institutions doing these loans. How come you're not opening it up to private hedge funds like ours to benefit or, you know, considering our expertise in the real estate market and industries?

FDIC STAFF MEMBER: Well, this is an FDIC program, and the FDIC, as you know, has been a program for insured depository institutions. And while we're doing this under the Systemic Risk Exception, we think we should confine it to those institutions, and, as I said, if there are costs associated with the program, those costs will fall to insured depository institutions. So, we think it's appropriate to keep it within that universe.

CHAIRMAN BAIR: This is Chairman Bair. I think we should also point out there's a securities purchase program that will be run by the Treasury and the Fed that is not limited to insured depository institutions. So, I think you're referring to securities. So, this is -- at least initially, we're going to be looking at loan purchases. But securities will be handled in another facility.

MR. GILBERTINE: We were looking at the actual real estate assets, and, obviously, we would like to participate in some way, but, obviously, if it's -- you know, if it's limited --

CHAIRMAN BAIR: Well, as investors you can. Investors you can. It's as sellers you may not. But subject to our eligibility criteria, as investors you can.

MR. GILBERTINE: Okay. Excellent. Thank you very much.

CONFERENCE CALL OPERATOR: Next question comes from Mark Rooney, with American Life.

Sir, your line is open.

MR. ROONEY: Thank you. A question on the arm's length separation of investors and sellers, specifically I'm referencing page 3 of the terms sheet, which says that private investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10 percent or more of the aggregate capital of the PPIF. Can you clarify that, please?

CHAIRMAN BAIR: I think the goal there is to have arm's length investment transactions and to basically have a transparent system where unaffiliated investors don't bid on the assets their affiliated entities or where there's a significant ownership interest in the --

MR. ROONEY: Okay. Can you define "affiliate"? Is that the GAP definition of "affiliate"?

CHAIRMAN BAIR: Well, generally, the Bank Holding Company Act has a definition of "affiliate," which means under common control essentially, the basic definition. So, yes, it would be probably along the lines of the Bank Company Holding Act "common control" definition.

MR. ROONEY: Okay. On the 10 percent, we had some discussion here at America on what that means. That's not precluding an individual investor from being the sole capital or private investor of a PPIF. Is that correct? Because this can be read in that you can't have more than 10 percent of the private capital in a PPIF that is one single investor. So, I just wanted to clarify that.

FDIC STAFF MEMBER: That's not our intent --


FDIC STAFF MEMBER: -- to have that limitation.

MR. ROONEY: So, we could, as an investor, have 100 percent of the private capital in a PPIF -- is that correct -- in partnership with the government?

FDIC STAFF MEMBER: That is correct, assuming you meet all other eligibility criteria.

MR. ROONEY: And what are those other eligibility criteria?

FDIC STAFF MEMBER: Well, we're going out for comment on those and, you know, we would expect that, of course, when we publish those, those will be very transparent, and we'll go through a process to ensure that potential investors do meet those eligible criteria before submitting bids.

MR. ROONEY: Okay. And another follow-up: Have you considered the fact that using leverage in a purchase would actually -- it creates a fear of loss as much as it does a bid, in that the real effect of this in the long term is to eliminate the liquidity discount, but it will really not serve to bid up the truly distressed assets. In other words, the only time that leverage works is when investors believe that the price is either (a) stable or (b) is going up. It's a self-feeding process in that respect.

But if there's any kind of sense that asset is being sold at a higher price that its ultimate recovery, regardless of the government's participation in the debt side or the guarantee, and on the private side, no investor -- a dollar of capital is a dollar of capital -- no investor is going to make that investment. Have you considered that?

FDIC STAFF MEMBER: Well, we think there's a lot of room between the cash flow on the underlying assets and what the market is willing to pay now if it has to go out for its own financing. And so, a key part of the program is that financing is provided by the FDIC and can be lower cost and help find a price between those two extremes.

MR. ROONEY: Okay. But that still doesn't eliminate the effective leverage that will magnify losses.

CHAIRMAN BAIR: Well, excuse me -- the investors who are making the pricing determination --investors will know in advance the degree of leverage we're willing to provide.


CHAIRMAN BAIR: So, I assume that will be factored into your pricing decision.

MR. ROONEY: Okay. And, Chairman Bair, is there any indication that the FDIC would use this as a -- I don't want to use the word "coercive," but as an action sort of nudge the banks along to sell the assets? Or is this truly a private/bank to sell?

CHAIRMAN BAIR: Well, there will be consultation with the bank supervisors on participation. We have asked for comment about the appropriate incentives for the sellers. I mean, bank supervisor ask banks to address all the time issues related to asset quality, and this facility will provide another option now for banks that have certain categories of these assets that need to be cleaned up on their balance sheets. So, I think it's an additional tool to be provided by banks, but certainly there won't be any more -- the supervisory process is already there. I guess this just adds another tool now.

MR. ROONEY: And can you give us a head count of people that you have devoted to this?

FDIC STAFF MEMBER: I'm afraid we have to move on to the next question.

CONFERENCE CALL OPERATOR: Thank you. Our next question comes from Mr. Bill Brompton, with Community One.

Sir, your line is open.

MR. BROMPTON: Yes, another speaker did mention -- did address eligibility and minimum requirements. However, in doing so, implied that OREO assets may be way down the list. I suspect that most loans that would be considered for sale -- the foreclosure process is very near or recently past, and it would seem perhaps that delaying the purchase or the inclusion of OREO assets in the program would have some negative effects perhaps influencing, perhaps delaying, what ought to be a foreclosure process beginning or having the effect of putting the judicial cost into the investors' assessment of how much they're willing to pay for the assets. So, I would like to hear your thoughts on that and on how soon banks will know what these minimum requirements will be.

MR. FRYE: Thank you. I spoke to the eligibility issue earlier in terms of assets, and we certainly welcome your comments -- that's part of the Q & A that's gone up on our board today -- to hear your logic there. I'm sure we would want to make this program as inclusive as possible going forward, but looking at the real estate loans, particularly the closed end, and then into the open end, because that becomes more problematic. We want to start where we can get the biggest success rate for this program, and then look at these incremental assets as we go forward.

Does that answer your question? I understand where you're coming from in terms of the OREO and a loan possibly being there a month from now. But interested bidders are going to look at that. They're going to understand what's going on in those individual credits when they do their own due diligence and will factor that into their bids.

FDIC STAFF MEMBER: And I just want to amplify what Dan is indicating, is that what we're referring to the initial contribution of assets to our Public-Private Investment Fund, it certainly is contemplated that certain actions will take place that may end up with a conversion of the loan collateral to -- or of the loan to its collateral, whether it be a piece of ORE or other asset. As Dan indicated, we anticipate that during the due diligence process, the various stages of collection associated with delinquent loans would be factor into the bid process and bid pricing that an investor would be willing to pay for those assets.

MR. BROMPTON: I gather from your comment then that the conversion of an asset from a loan to OREO during the process would not impinge upon its marketability necessary -- or, excuse me -- its eligibility?

FDIC STAFF MEMBER: That is correct. From the onset. But as Dan indicated, we're soliciting comment in the Q & A that we posted on our Web site today with respect to asset eligibility and, specifically, what price of assets we should be prioritizing in the program.

MR. BROMPTON: Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Jim Sorensen with Sorenson Group Holdings.

Sir, your line is open.

MR. SORENSON: Thank you. I think this is a great program. My question may have been answered, but I want to ask it again. Has it been determined if there are bidder -- and what the qualifications are under this program or is there some process to become qualified to bid?

FDIC STAFF MEMBER: We are soliciting comment with respect to certain facets of the sales process, and there clearly will be a bidder qualification process associated with the program. And there will be one associated with each individual Private-Public Investment Fund acquisition, and that's obviously due to the very nature that these pools are going to be different. They're not going to be homogeneous from fund to fund. And we would be expecting that investors are going to have different financial capabilities and, perhaps depending on the auction process works, be able to submit qualifications with respect to skill sets, expertise, special servicing, et cetera, that they could bring in to ensure that the investment on behalf of the government, the U.S. Treasury portion, is a relatively safe one.

MR. SORENSON: Just one other follow-up question: If you've been participating with the FDIC on bids in the past, will that be used as a measure in terms of qualifications and performance?

FDIC STAFF MEMBER: No, each individual fund -- a set of qualification and a qualification process will be associated with that offering.

MR. SORENSON: Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Ron Wagner, with Fremont Bank.

Sir, your line is open.

MR. WAGNER: Two questions, if I may: The first question relates to the auction process. Will banks selling into the auction process, selling assets, will they be able to set a reserve price or a minimum price on the asset?

FDIC STAFF MEMBER: Well, that's one of the facets of the auction process. We are soliciting comment. We'd like your input as to whether or not banks should be citing reserve prices, and if so, whether or not they would be disclosable. So, we would like to have your input on that.

MR. WAGNER: Okay. And then the second question is, in terms of the FDIC financing and if the thought to issue a note to the selling bank, have they thought about what the term and rate on those notes would be?

FDIC STAFF MEMBER: Each individual pool will be evaluated with respect to the amount of leverage we will be providing and, associated with that will be a determination -- once again, it will have to be based on the underlying assets in the pool as to what the cash flows will be associated with payments on the note. This is an issue that we are considering, taking a very -- I'll call it "deep" review of. One of the issues of items that the Chairman had indicated we're soliciting comment on is specifically a type of consideration that the bank will be receiving in return for contributing assets into the fund. And taking a look at that, obviously, the type of note and/or cash or whether or not it might be a participation certificate of some kind, it would be of hearing the industry input as to what the structure of that might be most desirable.

MR. SORENSON: Thank you.

CONFERENCE CALL OPERATOR: Next question from Todd Gradius, with Real Estate Decisions Corporation.

Sir, your line is open.

MR. GRADIUS: Thank you very much. I just had a question about the actual auction process. The submission of the bids, is this going to be an online platform? And if there is, will there be a solicitation of any kind for how this auction platform is going to be run and set up by whom?

FDIC STAFF MEMBER: Well, currently, you know, we are, once again, soliciting input from the industry as to what type of auction process would best facilitate a broad investor interest. So, the actual mechanism hasn't been determined yet, whether or not it would be some type of online vehicle or whether or not it would just be a sealed-bid auction of some type.

And with respect to how you want to characterize -- the participants will submit bids and I'd say participate in the actual auction itself. If there are any comments that you have -- whether or not, for example, a Dutch auction, English outcry -- that might be getting to what you were alluding to in your question -- would be more beneficial for determining a fair price for the assets. We'd like to have your input on that as well.

MR. GRADIUS: Sure. And then just a quick follow-up on that: As far as who will actually run the auction, how is that going to be set up?

FDIC STAFF MEMBER: Well, right now, we anticipate hiring a financial adviser for each one of these transactions, and the financial adviser would be overseeing the auction process, whatever that is determined to be.

MR. GRADIUS: Okay, like, say, who the auction vendor would be, for example?

FDIC STAFF MEMBER: Well, the financial adviser would be the party that would be overseeing the actual auction process.

MR. GRADIUS: Okay. Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Miles Borden, with Troutman & Sanders.

Sir, your line is open.

MR. BORDEN: Yes, thank you. Once a PPIP has acquired a pool of loans, will there be any restrictions on their restructuring of those loans or exercising remedies if those loans go into default?

FDIC STAFF MEMBER: Yes, we do contemplate that there will be certain restrictions. For example, we would expect single-family loans, residential loans, would be subject to the U.S. Government Loan Modification Program, and there are likely to be other restrictions as well. We would like your input as to what you believe the appropriate restrictions would be for -- I'll call for lack of a better term, "working out" for that loan portfolio. So, we would be very interested in receiving your input as to what additional requirements should be built into the documentation which establishes the relationship associated with the servicing of these assets.

MR. GRADIUS: Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Sam Lee, with Unity Bank.

Sir, your line is open.

MR. LEE: I have a few quick questions about the -- from the Legacy Loan Program. Who would be the third-party valuation firm for like the FDIC to provide the independent valuation?

FDIC STAFF MEMBER: We will be going out for a procurement of firms to conduct these valuations, and as with our procurements, we will be reviewing the qualifications as well as the pricing associated with the respondents for that procurement.

MR. LEE: Also, are there arranger's fees, of the administrative fees that will be paid to the FDIC?

CHAIRMAN BAIR: This is Chairman Bair. This will be undertaken under an MOU with the Treasury, and so some of the administrative expenses will be paid for by Treasury under their TARP program. We anticipate, obviously, a lot of others will be taken out of the revenues produced by the purchased assets.

And, Jim, do you want to add something?

MR. WIGAND: Yes. I guess one part of that, I want to say, is that the sales costs and expenses, with the sale itself, will come out of the proceeds from the sale.

MR. LEE: Also -- last question: Are there any requirements to the participating bank after selling the loan?

FDIC STAFF MEMBER: I'm sorry. Could you repeat the question?

MR. LEE: My question is, are there any requirements to the participating bank after the bank sells the loan?

FDIC STAFF MEMBER: Are you specifically asking whether or not the selling bank will have a servicing obligation or servicing obligation after the sale?

MR. LEE: Yes.

FDIC STAFF MEMBER: Yes, it is anticipated that initially that the selling bank would have, for a period of time, a subservicing agreement with the fund. However, we are anticipating that all of these loans will be sold servicing-released so that the fund manager would ultimately have the decision as to when to move the servicing.

MR. LEE: Okay. Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Howard Justus, with Crystal Realty Advisors.

Sir, your line is open.

MR. JUSTUS: Thank you. My question is, does the FDIC anticipate that assets inherited from failed institutions will be run through this program or is it their intention to continue the programs that are currently in place?

FDIC STAFF MEMBER: This program is designed for open institutions. So, it is a separate program from our receivership program.

MR. JUSTUS: Thank you.

CONFERENCE CALL OPERATOR: One moment, please, for the next question. Our next question comes from B. Kottel, with Galleon Group.

Sir, your line is open.

MR. KOTTEL: Hi. Thanks for taking my question. Just quickly, in terms of the actual assets, the loans which you're willing to kind of put through this process, are residential construction and commercial construction loans included in Round 1?

FDIC STAFF MEMBER: Yes, we're looking at any real estate-backed loans being inclusive. Some are still open and being funded. We need to figure out the logistics there, but we do not want to rule out any type of loans at this point.

MR. KOTTEL: Okay. And so, if it is a residential construction loan, how are you going to try to differentiate between -- you know, let's say there's a bank who's based in Minnesota who has residential construction and then a Florida bank. So, how are you going to allow the bidders to do due diligence on these assets because they're, obviously, going to be very unique, unlike residential mortgage assets, which have certain criteria -- FICOs, LTVs -- which are much easier to kind of cipher through.

FDIC STAFF MEMBER: Yes, we are anticipating that -- first of all, at least initially, for the earlier funds that are established, there will just be one bank contribution funds, and it would be later in the program where we'll start pooling assets across financial institutions into a single fund. So, that's really sort of the second phase of the program.

And we do anticipate, as I mentioned earlier, that we'll have a due diligence process where we will be hiring or retaining a contractor to conduct due diligence and provide that information basically in a data room, probably some of it on a virtual data room, some of it on a physical location, for investors to review, which will hopefully minimize the cost of the due diligence performance that an investor would have to undertake.

MR. KOTTEL: Okay, great. Thanks a lot.

CONFERENCE CALL OPERATOR: Next question from K.S. Cole, with JP Morgan.

Sir, your line is open.

Mr. Cole, your line is open. Sir, your line is open. You may ask your question.

MR. COLE: Hello, hello?

FDIC STAFF MEMBER: You're on. You can ask your question.

MR. COLE: Yes. Hi. I'm an analyst a JP Morgan. You were -- this question has been asked, but I want to clarify. Do you expect the assets that would be contributed to be cash-flowing or can they be non-cash-flowing since you're leveraging these assets? I'm wondering where the cash flow would come from to pay the coupon on the FDIC debt. Thank you.

FDIC STAFF MEMBER: It's a very good question, and we anticipate that, at least in the initial program -- phase of the program, when we're looking single bank contribution pools, that in the discussion between the bank, its primary federal regulator, and the FDIC, there will be discussion as to what type of asset mix would be appropriate for the pool. And we will, obviously, then be making a determination with respect to both the amount of leverage and the type of payment structure of the note, based on the characteristics of the underlying asset pool.

MR. COLE: Is it fair to say that assets don't necessarily all have to be cash-flowing within that pool?

FDIC STAFF MEMBER: That is correct.

MR. COLE: Thank you. I appreciate it.

CONFERENCE CALL OPERATOR: Next question comes from Mr. Sardonio, Bank --

Sir, your line is open.

MR. SARDONIO: Yes. If a bank chooses not to participate in any of these programs, would they be subject to the FDIC special assessment for the program?

FDIC STAFF MEMBER: Yes, they would.

MR. SARDONIO: Okay. Thank you.


CONFERENCE CALL OPERATOR: Next question comes from Rod Dubitsky, with Credit Suisse.

Your line is open.

MR. DUBITSKY: Yes, hi. Thank you. I'm wondering how the due diligence process on the auctions will work in terms of the timing of the auction. Will the auction be held and then the auction price will be subject to due diligence and any loan kick-outs? Or will all the information be expected to be reviewed prior to the auction, so that the auction results are final and no additional due diligence will be done? And, relatedly, will the buyer have the opportunity to put back loans to the seller if the loans fail any reps and warrants on the loan terms?

FDIC STAFF MEMBER: As I indicated earlier, we are soliciting comment with respect to the auction process. And so to the extent that you have an opinion or recommendation with respect to -- I'll call it a second due diligence, that would be much appreciated. Right now, it's contemplated that there certainly will be a due diligence which is performed prior to the auction bid itself. It's also contemplated that the seller will be granted certain reps and warrants associated with the asset pool. Those would be determined, of course, on a case-specific basis. We don't anticipate that those would be uniform because they'll vary by seller and by the type of asset pool being contributed.

I would say, generally speaking, it is anticipated that the program would not have a post-bid due diligence option associated with the process. However, as I stated earlier, to the extent that the industry has an opinion on that, we appreciate your input.

CONFERENCE CALL OPERATOR: Next question comes from

MR. DUBITSKY: Thank you.

CONFERENCE CALL OPERATOR: Next question comes from Rod Komuchee, with D.E. Shaw.

Sir, your line is open.

MR. KOMUCHEE: Hi. Generally, I'm interested in what level of interest you've seen from the banks to participate in this process so far, and if the FDIC is not seeing a lot of selling participation, does it have any ability to force the banks to participate?

FDIC STAFF MEMBER: Well, we just announced this program on Monday, and we've just, you know, started -- provided the industry with an idea of what it is, and so we're soliciting input from them, and we'll be talking to banks about the participation and assume they'll be talking to their primary federal regulator about it.

FDIC STAFF MEMBER: And we're not looking to be forcing institutions into the program. We have received some expressions of interest already from institutions that want to participate.

UNIDENTIFIED SPEAKER: I have a question, if it's possible, in terms of control rights, is the private investor going to control 100 percent of the investment? And if not, how do you solve differences of opinion between the equity holders?

FDIC STAFF MEMBER: Right now, it's contemplated that, as I indicated earlier, that with respect to the servicing of the loans, the servicing will be held by the equity holder, that the loans will be sold servicing-released, and that the rights of the equity participants will be established by the contractual document associated with the transaction. We are in the process of, you know, going through those right now and making determinations as to what the rights of the equity participants will be with respect decision making that the general partner or general manager would control.

These items would be nice to have, but these items will clearly be known prior to when bids would be taken. They would certainly, you know, be put out in the due diligence room.

CONFERENCE CALL OPERATOR: Rick Scaith, with First Citizens Bank.

Sir, your line is open.

MR. SCAITH: Excuse me. I think I had my question answered.

FDIC STAFF MEMBER: Operator, it looks like we have time for just one more question.

CONFERENCE CALL OPERATOR: Okay. One moment. Gerard Cassidy, with RBC Capital Markets.

Sir, your line is open

MR. CASSIDY: Thank you. In regards to the banks that do decide to participate, the bids come in, and the banks do not to accept the bids because they're too low, will the supervisors and the regulatory exams be able to use that as a guide to require the banks to mark down their assets to those bid prices?

MR. STORCH: This is Bob Storch, once again. Assuming the loans have been in the held for sale account -- held for investment account prior to the consideration of selling them, the remainder of the loans in the held for investment account really wouldn't be affected by what the price is because they're carried at amortized cost less a loan loss allowances. Depending on how the volume of auctions works and the amount of transparency about prices and so forth, there may come a point in time where there's enough information out there that those data points could be used for valuing other assets that do have to be fair-valued, but the program is not going to change the existing accounting rules about what assets are accounted for at fair value versus an amortized cost basis.

MR. CASSIDY: Okay. And in regards to the leverage that has been proposed in the plan up to six times, will there be different leverage limits on the asset classes, meaning that a resi mortgage that's sold is less risky than a C&D loan, therefore there may be less leverage allowed on the C&D loan purchased? Or is it all going to be the same.

FDIC STAFF MEMBER: Now, the leverage will be determined on a transaction-by-transaction basis, and we will arrive at what that leverage will be based on a determination of the underlying cash flows and risk characteristics of the portfolio.

MR. CASSIDY: And that will be determined by the FDIC or by the financial adviser, on the leverage?

FDIC STAFF MEMBER: We will actually use our valuation contractor and our financial adviser to assist in making that decision.

MR. CASSIDY: I see. And then one final question: If you don't get enough banks to participate in the program because the bids are just high enough to their liking, is there any other positive incentives you can give them to get more to participate?

FDIC STAFF MEMBER: We're seeking comment on that.

MR. CASSIDY: Okay. Thank you.

FDIC STAFF MEMBER: Thank you, everyone for participating in the call. I'm sure there will be a tremendous level of interest moving forward.

Probably the easiest mechanism for keeping track of developments with the program would be through our Web site, which we have a dedicated page on fdic.gov. That address is www.fdic.gov/llp. There you will find a link to join a subscription list. So, if there's any material change to the llp Web page, you would be notified of what it is and you can go and look at it.

There are a couple of e-mail addresses to provide comments, and also another e-mail address potentially for questions outside of those parameters.

And with that, we would envision this being the first in potentially a series of conference calls. So, we thank you very much for your participation today.

[Whereupon, the conference call was concluded.]

Last Updated 03/30/2009 LLP@fdic.gov

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