FDIC May Let Banks Share Profit From Distressed Loans They Sell

Today from Bloomberg:

The Federal Deposit Insurance Corp. is considering giving banks the chance to share in future profits on loans sold into a U.S. government-financed program to remove distressed assets.

The FDIC may allow the sellers of a loan to get an equity interest in the vehicle that buys it, meaning they would gain from any future increase in the asset’s value. The aim is to give healthier banks an incentive to sell loans at a cheaper price, encouraging more investors to make bids.

“One option is for the seller to retain an equity interest as a part of the consideration for the sale,” Jim Wigand, the FDIC’s deputy director for resolutions and receiverships, said in an interview.

The FDIC is considering a change in the original outline of how to finance the purchases, according to documents posted on its Web site.

Rather than guarantee debt issued by the buyers as previously envisaged, the program could issue FDIC-backed notes directly to the banks that are selling loans. That would avoid underwriting fees and accelerate the process. It might be a simpler way to run the program, Wigand said.

By effectively trading illiquid loans in exchange for FDIC- guaranteed notes, the selling banks would strengthen their balance sheets. The FDIC notes would carry higher ratings and may also be eligible for use as collateral for Federal Reserve loan facilities.

Officials aim to have the first purchases under the PPIP begin within weeks of the conclusion of stress tests this month on the nation’s biggest banks to assess the vulnerabilities of their balance sheets.

Yet another trial balloon......