FDIC: Banks Can't Buy Own PPIP Assets

Some financial institutions are petitioning federal regulators to let them wear two hats to the administration's ""Public-Private Investment Program"":http://www.financialstability.gov/roadtostability/publicprivatefund.html (PPIP). They want to be able to use public money from the government to help them buy back the so-called toxic assets that they and other banks put up for sale.
But FDIC Chairman Sheila Bair quickly quelled any uncertainties about who will be eligible to purchase legacy mortgages and other under-performing assets through the agency's PPIP auctions. Speaking at a press briefing in Washington on Wednesday, Bair said, ""There should be no confusion. Banks will not be able to bid on their own assets.""
The goal of PPIP is to purge banks' balance sheets of the bad mortgages and other holdings that have led to substantial write-downs since the beginning of the financial crisis and raised questions about the health of the nation's banking system. By liberating lenders of such assets, the government hopes to free up additional capital that the banks can then pour back into the economy by stepping up their lending.
The FDIC has been tasked with running the legacy loan portion of PPIP, which it should be noted is separate from the legacy securities portion under which investment fund managers named by the Treasury will receive government assistance in the form of taxpayer dollars to make bulk purchases of mortgage securities pools. Although Bair declined to comment on an expected start date for the legacy whole loan auctions, Treasury Secretary Timothy Geithner recently told the Senate Banking Committee that PPIP should be operational by early July.
The _""Wall Street Journal"":http://online.wsj.com/article/SB124338836675757049.html_ reported earlier today that banking organizations such as the Clearing House Association LLC - which includes JPMorgan Chase, Bank of America, Wells Fargo, and seven other of the nation's largest financial institutions as members - have been lobbying hard for the FDIC to let lenders purchase their own assets auctioned off through PPIP. The banks argue that allowing them to participate as buyers would further encourage them to sell their assets through the program and offer up their holdings at lower prices, perhaps even at a loss.
The Clearing House Association said in a ""letter sent to the FDIC"":http://www.theclearinghouse.org/reference/comment_letters/commentLetterDocs/069887.pdf last month, ""Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside.""
Some large institutions have already expressed reluctance to participate in PPIP. With plummeting property values, they may be inclined to hold on to mortgage assets they deem to have inherent worth under the conventional principle that conditions must improve at some point, rather than offload these assets at depressed market discounts.
Indeed, Bair acknowledges that banks may be disinclined to take part in PPIP. According to a _""Bloomberg"":http://www.bloomberg.com/apps/newsxpid=20601087&sid=a_cSJOgFLwPs&refer=home_ report, Bair cited uncertainty about the government's authority over the program, unclear regulations, and fear that lawmakers may change the rules mid-step. The news agency also said that Bair pointed out banks have had success lately raising their own capital, which may mean they have less incentive to sell off assets. Neither the FDIC or Treasury have said yet how many institutions they expect to participate in the administration's Public-Private Investment Program.
Still, some industry players are opposed to allowing banks to take on the role of buyer in the program as an enticement to participate. According to the _Wall Street Journal_, critics see the proposal as banks trying to profit through financial engineering at taxpayer expense.
Arthur Levitt, an adviser to private-equity firm Carlyle Group LLC and a former Securities and Exchange Commission (SEC) chairman, told the _Journal_, ""To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm's books but really doesn't offload it is highly problematic.""