WASHINGTON — A test run of the government's bad-loan removal plan has been shelved as officials struggle to attract both sellers and buyers.
The Federal Deposit Insurance Corp. had planned the test of its Legacy Loans Program for June, but a host of issues have arisen, including congressional restrictions on participants and the persistent challenge of pricing loans to be disposed through government auctions. Moreover, a consensus is growing that as bank capital positions improve and the values of some written-down assets bounce back, the need for the program has subsided.
As a result, sources say, the FDIC has put the test on hold and the program could be scrapped.
"It doesn't feel like a priority at this point," said an industry representative who asked not to be identified. "I'm not sensing as much of a need on the part of the banking industry for this kind of a program. A lot of the banks have already written down all of these assets."
The toxic-loan plan is one half of the Treasury Department's Public-Private Investment Program, which officials unveiled in March. (The other half, the Legacy Securities Program aimed at removing illiquid asset-backed securities from financial institutions, is still on track to launch as early as July.)
The loan program was supposed to combine Treasury and private-equity funds with debt backed by the FDIC to establish investment funds that would buy troubled bank loans at big discounts. It echoed the Bush administration's original goal for the $700 billion Troubled Asset Relief Program. But that plan, too, was eventually abandoned, because the government could not figure out how to price the loans.
"Everybody you talk to at the agencies says it's dubious at best that a viable program can be put together," said William Isaac, a former FDIC chairman.
New hurdles have also emerged. A bill signed into law last week will create a new oversight regime to prevent fraud and conflicts of interest by PPIP participants. But bankers are concerned it will create overly burdensome restrictions, and is just another sign lawmakers are making participation in bailout programs more difficult.
"There is still a very deep distrust among the industry for anything that comes out of Tarp on the grounds of additional strings that may be attached later," the industry source said.
The new legal provision, an amendment to broader legislation by Sens. Barbara Boxer and John Ensign, "suggests that those concerns are not over," the source said. "It suggests Congress may still yet do things."
Officials, including FDIC Chairman Sheila Bair, and other observers have also said that with their capital situation stabilizing, banks feel there is less urgency to cleanse their balance sheets.
Isaac said some institutions are finding that asset values have rebounded. The big banks "have marked these assets down so low that they're actually getting a decent cash-on-cash return, and they don't want to sell them at these prices," he said.
It is possible the whole-loan program will be recast on a smaller scale. "There is still a very, very strong push by the FDIC, Treasury and the Fed to make this work," said Karen Shaw Petrou, the managing partner for Federal Financial Analytics Inc.
Kip Weissman, a partner at Luse Gorman, said that while there are "inherent problems" with the toxic-loan plan that "haven't gone away … it's still an idea with merit for special situations.
"It may not be what we thought it would be a couple months ago, but I think there will still be some deals and it will still be a program that they use," he said.