U.S. FDIC launches test of toxic asset sale program

By Reuters Staff
July 31, 2009

WASHINGTON, July 31 (Reuters) – The U.S. Federal Deposit Insurance Corp is launching the first test of its Legacy Loans Program to help banks rid their balance sheets of toxic assets so they can raise new capital and increase lending, the agency said on Friday.

The FDIC insures the deposits of U.S. banks and acts as the receivership for failed institutions by liquidating assets.

In the test transaction, a receivership will transfer a portfolio of residential mortgage loans to a limited liability company in exchange for an ownership interest in that entity, the FDIC said in a statement.

Accredited investors will be offered an equity interest in the limited liability company under two options.

The first is an all-cash basis, which is how the FDIC has recently sold receivership assets, with an equity split of 20 percent to the investor and 80 percent to the FDIC. The other option is a sale with leverage, under which the equity split will be 50-50 between the investor and the FDIC.

The FDIC said it will be protected against losses by the limits on leverage amount, the mortgage loans collateralizing the guarantee, and the guarantee fee.

“The FDIC will analyze the results of this sale to see how the Legacy Loans Program can best further the removal of troubled assets from bank balance sheets, and in turn spur lending to further support the credit needs of the economy,” the agency said.

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