WASHINGTON — The Federal Deposit Insurance Corp. is getting plenty of input, including some conflicting advice, as it develops a program designed to create a market for troubled loans.
In comment letters due last week, representatives for both banks and investors said the Legacy Loans Program should be broad and include credit and corporate loans, municipal securities and loans secured by farmland.
"It would … be preferable to give a bank that proposes to sell assets through this program the opportunity to sell any assets on its balance sheet after consultation with its primary regulator," lawyers at Orrick, Herrington & Sutcliffe LLP in New York wrote in a letter dated April 10.
Others took that argument one step further to include the actual homes that banks are repossessing through foreclosure.
"Including a wider array of classes provides a more comprehensive approach to dealing with not only the current stressed portfolios, but emerging problems, as well," wrote Irene M. Esteves, the chief financial officer at Regions Financial Corp. "In order to fully cleanse the balance sheet of problems assets, all loans including non-accruals should be included."
But Judith Carre Sutfin, the CFO at the $5 billion-asset Amcore Bank in Rockford, Ill., urged the FDIC to focus more narrowly.
"Addressing commercial and industrial loans or consumer loans (such as auto loans or credit cards) will detract from the capacity to address real estate," she wrote.
The program, which the FDIC is creating as part of the Obama administration's plan to cleanse bank balance sheets, is still in its early stages. The agency gave interested parties until Friday to weigh in on the program's final shape.
The FDIC has provided no timetable for the program's launch, but officials have said they would begin with real estate-related assets. The agency could propose a more detailed program and then ask for a second round of comments.
According to the American Bankers Association, in addition to expanding asset eligibility beyond real estate, the program should let banks profit by being buyers, too.
"While some have expressed reservations about permitting banks to profit by purchasing assets through the LLP, it would be curious to hamper a program designed to benefit banks because of a concern that banks would benefit," wrote Mark J. Tenhunfeld, the trade group's director of regulatory policy.
He also reacted to early indications that the FDIC may sell the loans in individual pools, each limited to one bank. Tenhunfeld warned that doing so could limit participation to banks that can sell a lot of loans.
"Either the FDIC is prepared to offer very many and very small pools of loans, or those banks that do not want to, or cannot, sell many loans will find themselves shut out of the program," he wrote.
Though some bankers have argued they should be allowed to keep an interest in any pool of loans sold, Diane Citron, the head of government affairs for Carrington Capital Management LLC of Greenwich, Conn., disagreed with that notion.
"The cleanest program with the fewest participants should be most effective," she wrote. "We believe that the addition of another potential equity participant alongside Treasury and the private investor could further limit investment opportunities available to private investors."
Bank of America Corp. was the only giant banking company to weigh in — at least among the 320 letters the FDIC had posted on its Web site as of Monday. (The agency said it would likely have all the comments it has received online by Wednesday.)
Gregory A. Baer, a deputy general counsel at B of A, argued that investors should be able to resell their interest in a loan pool on the secondary market.
"Free transferability of interests" in the public-private investment funds "would foster market efficiency and make the program more attractive to investors," he wrote.
According to Orrick, Herrington & Sutcliffe, the best way to attract a large number of bidders is to keep their identities anonymous. Releasing the names "may feed additional public and political backlash that could dissuade groups of investors from participating," the lawyers wrote.