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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 Press and Technical Briefing Conference Call on Legacy Loans Program

FEMALE SPEAKER: Good afternoon, and thank you for standing by. At this time all participants are in a listen only mode until the question and answer portion of the conference. During that time, if you would like to ask a question, please press star one on your phone. You will be prompted to record your first and last name. I would like to remind all parties this conference is being recorded. If you have any objections you may disconnect at this time.

And now I will turn the call over to your host today, Mr. Andrew Gray. Sir, you may begin.

MODERATOR: Thank you very much for joining us. I'm sorry we are a little bit late, but Chairman Bair is here. What we thought we would do is, the chairman will provide a brief opening statement, and then take a few questions and then, after that, we'll turn it over to professional staff here to answer any further questions. That would be on background and we would just be able to provide clarity to any questions that you may have.

So, with that said, I'll turn it over to Chairman Bair to start. Chairman Bair.

CHAIRMAN BAIR: Thank you, Andrew. It has been clear for some time that troubled loans and securities have depressed market perceptions of banks and impeded new lending. Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing. The Legacy Loans Program aligns the interest of the government with private investors to provide financing and market lease pricing and is a critical step forward in the process of restoring clarity to the market.

While there are inherent challenges implementing a program of this magnitude quickly, the framework announced today provides a foundation upon which the FDIC will begin the job immediately. We intend to move forward with this program in a methodical and transparent fashion, and we will provide the opportunity for public comments on critical assets of the program prior to implementation. Today's actions demonstrate the strong commitment of the FDIC, Fed, Treasury, and the Administration to use creative and innovative programs to address the serious economic issues facing our country. The Legacy Loans program, while providing substantial upside potential to private investors and the government, will also clear these troubled assets from bank balance sheets, enabling them to lend and restore economic growth.

Thank you very much, and we'll be happy to take your questions now.

FEMALE SPEAKER: Thank you. At this time, if you would like to ask a question from the phone, please press star one. You will be prompted to record your first and last name. To withdraw your request, press star 2. Once again, if you would like to ask a question, please press star one on your phone.

Your first question comes from Steve Leaseman of CNBC.

MR. LEASEMAN: Is this for Ms. Bair? I'm confused if the questions were for staff or for the --

MALE SPEAKER: This is for Chairman Bair. We're going to do about ten or fifteen minutes with her, then turn it over to staff.

MR. LEASEMAN: Chairman Bair, could you explain to me the leverage in the loan program at six to one? What qualifies for six to one and what doesn't qualify for six to one?

CHAIRMAN BAIR: Well, the credit quality of each pull back that is brought to PCIF will be evaluated by us, assisted by a third party valuation, and we will decide what the appropriate level of leverage is based on that valuation. I think six to one represents the outer range of the leverage that we would provide. It will be done on a pool by pool basis.

MR. LEASEMAN: Okay, thank you.

MODERATOR: Thank you, your next question comes from Rebecca Christie of Bloomberg News.

MS. CHRISTIE: Thanks very much. Ms. Chairman, how do you convince a bank to take the winning bid? Do you run the risk that, after deciding how much leverage to give and and after doing all this work to get these pools together, that the bank looks at the bid that comes in and decides that it doesn't like the price?

CHAIRMAN BAIR: Well, there's always that risk and I can't guarantee that that won't happen. But we think we've talked with a lot of people on structuring this and we are going to go out and get a couple more weeks of public comment to make sure we've got the best structure possible and, you know, markets will do what markets will do. But I think this structure has a better chance of any that I've seen to provide that magic price where a buyer and seller are willing to meet. but we won't find out until we get it up and running and see what happens.

MS. CHRISTIE: Will you and your fellow bank regulators put any pressure on banks to get rid of their assets, perhaps as part of the stress test examination?

CHAIRMAN BAIR: I think there will be a consultive process with the supervisors and, yes, this program will be among the tools available to banks to budget for capital positions.


MODERATOR: Thank you. Your next question comes from Binya Appelbaum of the Washington Post.

MR. APPELBAUM: Hello, Chairman. Could you talk a little bit about the 50/50 equity split between Treasury and private investors, why that number as opposed to some different number, what the thinking was there?

CHAIRMAN BAIR: That's a really good question. And that is one area where we're going to be seeking comment. You know, I think the trade-offs are with a greater share by private investors, you require the private sector having more skin in the game and so some will feel that will aid in the integrity of the pricing. On the other hand, if this entity is profitable, and my personal view is I think it will be very profitable, you're giving more profit to the private investors, so -- and we're doing more lending to the private investors, too, or guaranteed lending to the private investors with a bigger equity share.

So, we decided on a 50/50 split in the term sheet, but that is an area where we would like to submit some public input before we finalize?

MR. APPELBAUM: Thank you.

MODERATOR: Thank you. And your next question comes from Emily Flitter of American Banker News.

MS. FLITTER: Hi, thank you. Chairman Bair, what will the impact be on the deposit insurance fund of this program and the fees assessed for guaranteeing the debt?

CHAIRMAN BAIR: Yeah, that's a very good question. Well, first of all, this program is being undertaken pursuant to systemic risk authorities and, by statute, if you would have losses on this program, they would be not come out of the -- there would be a separate assessment that would be applied industry-wide.

We will be charging a guarantee fee and a portion of that guarantee fee will going to build the reserves to cover any losses that might be experienced, and a portion will also go into the -- insurance fund, similar to the surcharge we now impose on our temporarily liquidity guarantee program. Reserves for that program are also set aside separate from the -- we do impose a surcharge for the -- as well. So, that is the relationship.

That said, I think the credit risk on this program is quite acceptable. Even at a six to one leverage, which I think is the maximum amount of leverage we provide, we have a 15 percent cushion of capital to absorb losses, so we would only be guaranteeing 85 percent of the purchase price. And again, the purchase price is going to be at some discount, whatever is held at the bank's balance sheet. So, it's going to be bought at market, prior to investors setting the market price, and then the most leverage you would provide would be six to one, so we would be over-collateralized by 15 percent. So, I actually think the credit risks for us are pretty good on this. And our anticipation is that it will, it will help make money for the ________ as well.

MS. FLITTER: Thank you.

MODERATOR: Thank you. Your next question comes from Rob Blackwell of American Banker.

MR. BLACKWELL: Just following up on that, I mean, right now the Systemic Risk Authority you have to charge, I believe, all institutions, just banks and thrifts, if there were to be a loss at a later point. I know that you're seeking legislation to change that. Does this program make that legislation even more important?

CHAIRMAN BAIR: Well, I think that legislation is important on its own right and that legislation is being sought for a function of protecting the ________. I think, again, the credit risk on this program is pretty minimal, certainly less so than our deposit insurance which is unsecured, as you know, and other temporary liabilities in key programs that we've lost. So, I actually think that the credit risks on this are good.

I think the strong likelihood is for the market based pricing is that this will make money for us. We'll have plenty of reserves plus some extra we can put in for the debt. So, no. I don't think the two are really related. We do need additional flexibility and the increased borrowing authority, the emergency authority, but that's satisfied independent of this program.

MR. BLACKWELL: And then, just briefly, what kind of eligibility requirements will be on these? I mean, if I'm a bank, how I do know what loans are eligible for the program?

CHAIRMAN BAIR: Well, I think we're going to -- that will be another area where we'll seek comments, but I think we would like to target legacy real estate-related assets starting off. So, we'll be looking at high risk mortgages and commercial real estate. That's where we're going to start. I don't think we'll limit it to that, but it's where we want to put our first priority. And we want the banks to consult with the primary regulators in identifying the asset pools to bring with us, to bring to us. So, that's where we would like to start.

MR. BLACKWELL: Is there any chance regulators will start going, you know, you really should get rid of that asset?

CHAIRMAN BAIR: Any more so than they do now?


CHAIRMAN BAIR: I think the only difference is, now they have a place to take it.

MR. BLACKWELL: Exactly. Thanks.

CHAIRMAN BAIR: You're welcome.

MODERATOR: Your next question comes from Krishna Guha of The Financial Times.

MR. GUHA: Hi, Chairman Bair. This is Krishna from the FT. I wanted to ask you about the overall size of this part of the program. We were given a notional sort of $500 billion to a trillion for all Legacy asset purchases combined. Could you talk a little about how large you think this side of the program could become over time? Because obviously, the stock of Legacy assets out there, Legacy loans, is very large.

CHAIRMAN BAIR: Right. Well, we're going to be focusing on Legacy assets on bank balance sheets, _________ and balance sheets. We roughly size that a trillion. We think that, for instance, if treasury committed $50 billion in equity advancement to that, with a 50/50 shared equity with the private sector, there would be 100 billion in capitalization, and so the maximum on leverage would be $700 billion. I don't think all these obviously are not going to be at six to one leverage.

So, that's a long way of saying that my guess is we could do probably do about 500 billion, assuming we can get the dollar-for-dollar commitment from the private sector.

MR. GUHA: But how large is this relative to -- I'm sorry, I just want to be clear about how you're sizing the pool of Legacy assets in general. Because obviously, I mean, the total assets on the balance sheet of even a single large bank would be in excess of $1500 billion. So, how do you size the sort of pool of potentially problem loans that you're seeking to address and how do you define that?

CHAIRMAN BAIR: Well, we've done -- our rough estimates of Legacy real estate assets is close to a trillion for all banks. I don't know where you get 1.5 trillion for a single bank. That's all assets.

MR. GUHA: Yeah, I said all assets.

CHAIRMAN BAIR: So, not everything is, you know, a Legacy toxic asset. So, the class of assets we are targeting, the Legacy real estate assets, the high risk mortgages, the commercial real estate, we think that is about a trillion for bank balance sheets. And we think realistically we can do 500 billion with this program, with the $50 billion capital investment from Treasury and a matching 50 billion from private investors.

MR. GUHA: So, you won't be financing other loans or other classes of loans? This will be narrowly focused on residential and commercial real estate.

CHAIRMAN BAIR: That's where we're going to start initially, that's where we're going to target initially. We think if we start the program and it's a success, it may be expanded. Congress might want to provide further support for it. But we need to launch it and have a structure that we're sure that works and can demonstrate that it's working. And, if we can do that, we think that there may be some additional resources.

And clearly the real estate Legacy assets are where the big problem is. That's what we see in our supervisory process and that's what we get from investors, too.

MR. GUHA: Thank you.


MODERATOR: Thank you. Your next question comes from Damian Paletta of the Wall Street Journal.

MR. PALETTA: Hi, Chairman. First, do you anticipate mostly that large banks will be taking advantage of this or how will smaller banks be able to sell assets in this as well?

CHAIRMAN BAIR: Right. Well, this is open for all banks of all sizes. And yes, we do want small bank participation and we'll work with putting together a pooling mechanism for the smaller banks. Obviously, you need some size with these pools to have a meaningful option. But, we will provide a mechanism for pooling the small bank assets so that they will have the same opportunity to participates.

MR. PALETTA: Do you think this program can help bring banks back from the brink? I mean, obviously you guys have a growing number of banks on your problem list. Will those banks be able to sell assets and potentially revive themselves through this program or do you think a lot of those are too far gone already?

CHAIRMAN BAIR: Well, I think there there will be an increase in banks closing. We've said that a number of times. I think there will need to be a consulting process with the primary regulator and we will ultimately decide participation and eligibility.

So, I do think that there may be some banks beyond help, but there are others that, with this program, giving them the vehicle to cleanse their balance sheet and raise some fresh capital, I think we will help it. So, we think that, overall, it will be significant benefit to many banks, but some will be beyond help and will probably be closed, obviously.

MR. PALETTA: Thank you.

MODERATOR: Thank you. Your next question comes from Margaret Tanburn of Bloomberg.

MS. TANBURN: Hi, Chairman Bair. How difficult do you think it will be to price the assets at an attractive levels for the banks that hold them?

CHAIRMAN BAIR: How difficult will it be?

MS. TANBURN: Uh-huh.

CHAIRMAN BAIR: Well, can I just add one thing to the previous question? I assume that was on the selling side, the small bank participation. The healthy banks on the buyer side will also be able to participate, so, and that will go regardless of size. I wasn't sure if that was -- you're talking about both the buy and sell sides or just the sell side.

On the pricing, the pricing has always been the big challenge for watching this type of facility. And so we think we've hit the right balanace, using private investors to price, with government providing some low priced financing, diffuse liquidity premium, at our current market prices which are selling at very, very deep discounts, when they are selling at all. So, again, I think this is the best possible structure to get that pricing mechanism going, and get it to a place where buyer and seller are going to meet. But we just won't really be able to answer your question until we actually get it up and running and see what happens.

MS. TANBURN: All right. Thank you.

MODERATOR: Your next question is from Ghani Nadia of Market News International.

MS. NADIA: Good afternoon. I was wondering, you probably answered the question earlier, but regarding the deposit insurance funds, since you have recently worried about it, do you think that it's sufficiently funded to guarantee additional debt that is risky?

CHAIRMAN BAIR: Well, again, this program is taken under our systemic risk authority, so we do not use our deposit insurance funds to support this program. It's the other way around. Part of the proceeds in this program will support the deposit insurance fund. But if there are losses on this program, we don't anticipate that will happen, but if there is a loss on this program, we would first use our reserves, and then we would use special assessment on the entire industry.

So, we think this program will strengthen the debt, it will not weaken it. Because if you have systemic risk programs, you do not rely on the debt. There is a special assessment process with the systemic risk program.

MS. NADIA: Thank you.

MODERATOR: Your next question comes from Steve Leaseman of CNBC.

MR. LEASEMAN: Ms. Bair, how do you defend the program against the charge that the taxpayer is taking all of the risk on the lending side and half of the risk on the equity side, but only sharing in the upside? When it comes to the equity.

CHAIRMAN BAIR: Well, I think, again, the FDIC is providing the guarantee to provide the low cost financing. And we are an industry-assessed funding mechanism. So, yes, we have the full faith and credit of the United States government backing us, we have the authority to borrow from Treasury, but anything that we borrow always has to be repaid. So, I guess, on the financing side I would quibble a bit. Yeah, the low cost financing, our full faith and credit backing helps with that, but our funding mechanism is industry-funded and any borrowing we have to do, we have to do it on a __________ and I think the credit risk on this program is pretty low, but they would have to be repaid.

On the 50/50 split between private investors and Treasury, you know, I guess that gets back to my kind of opening comments about what the right split should be. If you think this program will make money, and my view is it's going to make money, I think the challenge is going to get the price high enough for banks to sell. I think the problem is going to be, if there is a problem, it is going to be low pricing, not high pricing. So, I think the upside potential here is going to be significant.

So, do we want to give taxpayers 80 percent of that or 50 percent of that? I mean, that's something we want to get some comment on. But I do think there's significant profit making potential here. And this, in fact, was the original idea behind ___________. The original -- when Secretary Paulson went to the Hill last year, this was the whole idea, the ___________ at the discount and provide upside potential for taxpayers over time. And I think that is what this will accomplish.

MR. LEASEMAN: Are you saying you don't expect to have to go to the Treasury to fund this program at anytime, that you should be either self-funding and/or profitable?

CHAIRMAN BAIR: Well, again, if the maximum leverage you would take on would be six to one, so there would be a cushion of, an equity cushion of 15 percent, which would be 50 percent funded by Treasury and 50 percent by private investors. So, and we would be overcollateralized to that extent, plus the assets would be purchased at fair value. So, there will be some level of discount over what I assume the banks are securing it at now.

So, I think with the level of overcollaterization and the fact that they're being priced to private investor participants committing their own capital, that the credit risks for us are fairly minimal.

So, no. I don't, you know, you can't guarantee anything, but I think our credit risks on this is actually really quite low.

MR. LEASEMAN: Thank you.

MALE SPEAKER: Operator, let's just do two more questions, then we'll move to the background.

MODERATOR: Sure, thank you. The next question is from Jane Sasseen of Business Week.

Jane, please check your mute button.

MS. SASSEEN: Thanks. Can you hear me now?


MS. SASSEEN: This kind of follows the last question because essentially a lot of people who have looked at this have said that if the taxpayers are providing more of the financing, but not getting as much of the upside, that they're essentially seeing this as somewhat of a subsidy for the private investors to go in and buy these assets up. And the question that has been raised then is in doing that, and the process will create a market price, but that's an abnormally high market price because the prices wouldn't -- the banks wouldn't get, are going to end up higher than they would if there wasn't that subsidy. So, how does that translate into a sustainable market as government funding, you know, is there an exit for government funding? I don't quite understand how that translates into prices that can last if there isn't a government subsidy behind them.

CHAIRMAN BAIR: Well, I think, I think the credit markets are still not functioning as well as they should. And just as it can be hard for, you know, small business people to get loans or certain classes of homeowners or new home buyers to get mortgages, there is a difficulty getting credit to buy bank assets. And because of this lack of credit availability, you're seeing very extreme distress prices when these assets sell, if they sell. You can't get credit to buy the assets, and then, since there is no market for it, you're going to have to hold on to them. So, that is weighing deeply on the prices of these assets and setting prices that are much, much lower than the true embedded credit losses would suggest.

So, we're trying to tease that liquidity premium out through the government providing low cost financing, but there will still be private investors and the third party evaluation firm doing very rigorous analysis of these assets and determining what the expected credit losses would be, and I assume adding some significant risk premium as well, given the uncertainties of the economy. So, there will be, you know, a pricing mechanism that we think has the private sector and private market integrity, and it really is a good thing to tease out the liquidity discount, to try to get these assets the level where people are actually willing to sell.

So, I think that's a good thing, not a bad thing. And, again, my sense is there will be private investors involved in this committing significant capital. There is no reason why they would set an unusually high price, I think it's the opposite, they will be setting a very reasonable price. So, I think there's a significant upside potential for the government. And, again, I think that gets back to one of the key questions we're hoping to get some comment is what should be the equity share. Because if our impression is right and the upside potential is great, it might be better for the taxpayer to have a bigger than 50 percent share. So, some of the advance commentary that I've seen that some media has been criticizing that because because the private sector doesn't have enough skin in the game, if they are, you know, less than 50 percent. So, I think we would like some comment on that.

But my sense is that, if this thing makes money, and I think it will, it's structured to be profitable over the long term, that the taxpayers should capture a lot of that. The taxpayers certainly have been having to support a lot of problems we're having in the financial services sector right now.

MS. SASSEEN: So, in other words, are you saying that the prices that will result in this will be much more realistic prices than would result right now, you know, to the extent that there aren't any buyers?

CHAIRMAN BAIR: Exactly. Exactly right. They will still be, they will be market prices. We're just trying to tease out the liquidity premium. What's weighing on market prices right now is that people can't get financing to buy assets, they can't get financing to buy assets not many people want to buy, you don't want to buy. And then you have to hold on to them forever because there's nobody to sell them to. So, that's -- by providing that liquidity that's lacking now, we're hoping to get the prices up to what would really be a true market level.

MS. SASSEEN: Thank you.


MODERATOR: The next question comes from Rebecca Christie of Bloomberg News.

MS. CHRISTIE: Hi, thanks very much for the question. Will there be restrictions, like the executive comp restrictions or some of the other types of restrictions, on the sellers of these pooled loans? Because they're getting a bailout benefit, will they be under restrictions? And also, are you going to require any of the pools whole loans to go through your mortgage modification program?

CHAIRMAN BAIR: Well, yes, the loans will be part of the President's loan modification program, so that first. So --

MS. CHRISTIE: I mean the administration officials, like Christine Rohmer, have been drawing a real distinction between the firms that get aid and the forms that go in with the government.

CHAIRMAN BAIR: I think investors will not, again, the investors are being asked to commit private capital and provide, do due diligence on these pools and provide input on what the market pricing will be. And the selling banks, many I assume already will be subject to those restrictions if they've already gotten TARP money. If a bank has not taken TARP money wants to come in and sell, we can get comment on that. I don't think legally now they would be subject to those restrictions. And frankly, I question whether they should be because, again, they're going to be asked to take a market price and they will have to take losses to sell into this facility. So, my sense is that unless the bank was already subject to them taking TARP capital, for sellers, those restrictions would not apply.

MS. CHRISTIE: Thank you.

MALE SPEAKER: Operator, at this point we'll just move on to a background staff briefing, and take further questions.

MODERATOR: Okay, thank you.

MALE SPEAKER: If there are any.

MODERATOR: Once again, to ask a question, please press star one.

MALE SPEAKER: Well, thank you very much.

MODERATOR: We have some questions coming in. Brian Collins of National Mortgage.

MALE SPEAKER: Hello. I was wondering if you could give us a timeline as to like when you guys will go out for comment, how long comment period will be, when will you, like, take the first bids on these pooled assets? Are you going to do pools like one at a time and sequentially to see if you can get better bids each time? How long will these pools actually be out there, and will they just hold them until infinity or how would they be worked?

MALE SPEAKER: Well, we'll be going out for public comment very shortly, and we'll be taking a very short comment period for the public comment period. We're going to get the idea to the public certainly and we also want to expeditiously, you know, but methodically implement this process so that we can make sure that we're getting the benefit of the comments but also moving ahead quickly.

I will say that, in terms of the FDIC, we have certainly begun implementing the planning process, the going forward. So, some of the other answers to your other questions are issues that we're still reviewing and still just trying to see how the process will work out. Obviously, the period of time even for how long a loan would be out for due diligence period will vary, or a pool of loans, will be out for a due diligence period will vary depending on the pooled loan, based on the quality, the characteristics of those loans. So, you can't really say that up front until you see what pools will be offered to us for participation in the program.

MALE SPEAKER: So we're not sure when we'll see the first offering?

MALE SPEAKER: Well, we will be in the process very shortly of discussions with some potential banks that will be interested in selling of pools of loans into this program. But we're also going through a fairly brief public comment period. We have, blending that process together, want to make sure we get into public comment

MALE SPEAKER: Okay, thank you.

MODERATOR: Your next question comes from Theo Francis of Business Week.

MALE SPEAKER: Hi, I have two questions. One, is the guarantee authority that the FDIC has under the temporary liquidity guarantee program or is this a separate authority?

MALE SPEAKER: This would be a separate authority. It's very similar to the temporary liquidity guarantee program, but it's separate from that program. As Chairman Bair mentioned, it will be subject to a different systemic risk termination because this is a guarantee that will be specifically for this program, the Legacy Loans program. And just to clarify, to make sure you understand, the FDIC guarantee will apply to debt issued by the particular pool of investment pools, public private investment funds, if you will, that's been described in the past descriptions. So, that fund will issue debt, the FDIC will guarantee that debt, the FDIC guarantee will be collateralized by all the assets held by the pool.

MR. FRANCIS: Okay. Then the other question is, it was determined it was very clear that the banks are likely to take a haircut in what they sell these assets for, relative to what they're on the books for. Why would they want to do that if they could hold on to them and keep them on the books where they are?

MALE SPEAKER: I think one of the reasons that the banks have been having difficulty, we have certainly seen the share prices of banks stressed in recent months, I think there has been a little bit of an overhang on the overall stability and liquidity of the credit markets. So, I think institutions are desirous of trying to clean their balance sheets, there will certainly be more attractive, if you will, to private investment and will have a better ability going forward to be strong and healthy. I think banks are looking at these assets as being a weight on their balance sheet.

MR. FRANCIS: And do you have positive indications from banks that they do want to participate?

MALE SPEAKER: Yes, we've had a number of discussions with institutions that are interested in participating.

MR. FRANCIS: Okay, thanks.

MODERATOR: Your next question comes from Steve Leaseman of CNBC.

MR. LEASEMAN: Yeah, hi. I'm just trying to keep pace with the number of questions asked by Bloomberg. So, just so you know.

MALE SPEAKER: You're doing a good job.

MR. LEASEMAN: I'm doing my best here. I'm confused, and probably because I don't understand all the inner workings of the credit markets. But, if I'm right, you're going to have to pool these loans on the books of the banks into securities, which essentially, doesn't that create an RMBS? And then why is there a separate program over at the __________ in the securities program, which is essentially an RMBS? Won't you just be creating the same thing that's available over in the securities program?

MALE SPEAKER: Let's make a very clear distinction. This program is dealing with pools of whole loans. The one on the other side is dealing with, for example, as you mentioned the RMBS. You do not have to package the loans in the pools we're talking about into securities that sell them to the Legacy Loan program. This is actually for whole loans.

MR. LEASEMAN: But they'll be packaged, won't they, very much like an RMBS is packaged?

MALE SPEAKER: No, it's just a pool of loans. For example, the bank has pools of loans that might be commercial real estate, it might be residential real estate, it might be development loans. So, there are ways, this is something the FDIC has had a lot of experience with in failed banks. If you kind of look at pools of loans as being an asset themselves that you can then sell, well that's why we're just making that simpler. A very similar process, that we've had a lot of experience with on the failed bank side to look at pools of loans that institutions will offer to us for sale into this Legacy Loans program.

MR. LEASEMAN: So, pools of unique assets rather than pools of like assets, like you would have in an RMBS? Is that fair to say?

MALE SPEAKER: No, they will be similar like assets, but there is no securitization involved with it.


MALE SPEAKER: I mean, basically it's a whole loan sale made by the banks to the investment fund. And the concept is that the investment fund is basically, the financing for the investment fund is coming from the FDIC guaranteed debt. So, in a securitization where the financing would come through the offering as a securities out in the marketplace and basically from that acquisition, here basically 85, up to 85 percent, or the six to one leverage, as the chairman indicated, would be provided through a guaranteed debt by the FDIC. And depending on the characteristics of those assets that are contained in the fund, you know, that leverage may change a little bit. And, as the chairman indicated, we're soliciting comment as to whether the 50/50 split for the equity portion is the appropriate one.

But, over time, the expectation is that these assets will be serviced and will repay and then, at some point, there would be, you know, what I characterize as a sufficient amount of the fund liquidated so that there probably would be, at some point over, once again, over time, a monetization of the remaining assets which may or may not be a securitization, depending on where the markets are several years down the road.

MR. LEASEMAN: Right. Banks have RMBS on their books, too, right?

MALE SPEAKER: Right, right.

MR. LEASEMAN: So, I just -- again, I'm confused here.

MALE SPEAKER: But that's

MR. LEASEMAN: Do we need two separate programs? Why are there two separate programs here?

MALE SPEAKER: I think what the view has been is that the programs will differ slightly in the way that they're structured. Ultimately between the whole loan program, which will be providing oversight for, the Legacy Loans Program. The Legacy Securities Program does have, you know, they purchase securities, they are market-to-market, there are some different issues involved in different types of assets. So, the view is then to have a program that will focus on whole loans, a program that will focus on securities. Now, the securities program I would certainly refer you for further comment on that to Treasury, but it's related to the relationship with the _______ and with Treasury program as well.

MR. LEASEMAN: Okay, thanks.

MALE SPEAKER: We'll have to take another question from Bloomberg.

MODERATOR: Your next question comes from Mary Hager of CBS news.

MS. HAGER: Yeah, hi. Can you talk a little bit about the auction process? Is there a mechanism in place already for that? How are those going to happen?

MALE SPEAKER: I'll give you basically the description and then I might turn it over to one of my colleagues who has been doing auctions for many years to sell bank assets by. The basic concept of the auction process in this particular, for this particular program, the Legacy Loans Program, is that 50 percent of the equity will be from the private investor and 50 percent from the TARP. We would have an auction for people interested in bidding in to participating at 50 percent of the equity for the private investor side. So, they would bid in a certain price for that and then, by the fact that 50 percent of the equity structure, that would then extrapolate out to be the value of the other 50 percent as well by doubling process, if you will, that the Treasury is going to be putting into this. And then you simply apply the leverage ratio for this particular pool that we would have defined in advance of the actual auction process, so that private investors would know what leveraged financing they were getting, whether it was four to one, five to one, or six to one. Then you simply apply that leverage into it with the financing of the purchase, and the equity amount of cash, if you will, the financed amount would then combine up to be the purchase price for the assets, in simple terms.

Do you want to --

MALE SPEAKER: Yeah, very simply, pooled assets will be identified and then appropriate financing structure will be constructed around the characteristics of that asset pool, and that goes to the comment that we would return the amount of leverage depending on those credit characteristics and cash flows of that underlying asset pool. Then what we would do is basically make an offering for an interest of 50 percent initially, and once again that's an item we're going out for comment on as to whether or not that should always be the case, and that will be dependent probably on, once again, the comments we get back as well as maybe the phasing of where we are in this program. And then we are literally selling the interest to the wife of that 50 percent owner, the private owner, will have. And they will be bidding on that through a competitive process, auction process, but a sealed bid auction process.

FEMALE SPEAKER: Thank you. Thank you. Your next question comes from Corine Hegland of National Journal.

FEMALE SPEAKER: I think you actually just answered my question. You have nothing to do with the Legacy Securities Program whatsoever, do you?


MS. HEGLAND: Thank you. Bye.

MODERATOR: Your next question comes from Rebecca Christie of Bloomberg News.

MS. CHRISTIE: You know, since Steve Leaseman got three questions, I had to get a third question in, too.

MALE SPEAKER: You can stop this question now, please.

MS. CHRISTIE: Hopefully this won't be too hard. When is the soonest we could see an auction? I have some analysts tell me that they think you all could have the first one these gone in about six weeks? Is that a realistic timeline? Do you think it will take a little longer because of the comment period?

MALE SPEAKER: Six weeks is very aggressive. We're going to have to go with the comment period, and then we're going to have to evaluate the comments we get before we can really solidify a structure. And, of course, we have to do that before we can really get into the process. But as was indicated earlier, the FDIC is moving forward on a number of its assets associated with this program. So, to some extent, I would say we're running several processes in parallel here. We really have to get that structure nailed down before we can really begin the marketing process in earnest.

MS. CHRISTIE: So, more like eight to ten weeks?

MALE SPEAKER: Yeah, that's going to depend on the comments.

MALE SPEAKER: Plus, you know, let's be honest. It will depend, in substantial part, upon these pooled assets we have offered as well.

MALE SPEAKER: Absolutely.

MALE SPEAKER: So, it depends on the size.


MALE SPEAKER: The size, the quantity, the size, the quality of the pools and the characteristics of the potential market for these type of assets.

MS. CHRISTIE: So, you can't give us any type of a, you know, you won't see one before at least seven weeks, so don't be calling us every day until we get to that point? I mean, is there any sort of time when we should be looking for one of these things?

MALE SPEAKER: We will certainly be open about when you'll be seeing one. So, I mean, it will be something that will be known.

MALE SPEAKER: Yeah. We will let the community know when we're ready to roll this out.

MALE SPEAKER: Right. But We are trying to move, you know, methodically through this but also trying to move expeditiously. So, we're trying to make sure everything is done well and done in depth, but also done at a relative speed.

MS. CHRISTIE: Okay, thanks.

MODERATOR: Thank you. Your next question comes from Stephen Joyce of BNA.

MR. JOYCE: Hi. Will the investors who buy the assets also manage them?

MALE SPEAKER: Investors who buy the assets will have the right, the right to what we call full servicing, but initially we anticipate that the selling banks will initially continue servicing those assets and that will be an arrangement that ultimately will be worked out between the private investor and the selling bank.

MALE SPEAKER: Effectively, you have a new owner so the new owner, like in many transactions, may lease servicing with the originating bank, if they decide to move it.

MALE SPEAKER: Or move some of it.

MALE SPEAKER: Right, move some of it.

MALE SPEAKER: Operator, let's just do two more, please.

MODERATOR: Your next question is from Amy Shoenfeld of New York Times. Amy, please check your mute button.

Okay. Once again, if you would like to ask a question, please press star one. One moment.

At this time there are no further questions.

MALE SPEAKER: Great. Thank you very much.

MALE SPEAKER: All right. Thank you.

Last Updated 03/25/2009 LLP@fdic.gov

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