Legacy Loans Program
They Cared to Comment
May 1, 2009 – Their views came in through computer terminals, writing desks, cafes, and public libraries across the United States. By the time the Federal Deposit Insurance Corporation's deadline for public comments on the recently announced Legacy Loans Program rolled around, more than 400 people – and likely a few paid lobbyists – had their say.
This comment process has shaped federal rulemaking since the passage of the Federal Administrative Procedure Act in 1946. Laws are carried out and enforced through regulation by U.S. agencies and the act is aimed at insuring that the public is fairly included in the regulatory process.
Click on word tree below to search comments
This word tree includes the text of nearly all the 419 comments that the FDIC received for its Legacy Loans Program. Users can type in any term or phrase into the search box. The results will show each time that term came up and the sentence in which it appeared. We started with the phrase "This program is" and 48 references were found. Users can click on each branch of the tree and the visualization will zoom in. About 9 percent of the comments were not included because they were added past the deadline or were not in a format that could be used.
The FDIC, along with other federal agencies, must comply with the act, which outlines standardized procedures for passing regulations. Most commonly, agencies will seek comments for proposed rules at least 30 days before they publish the proposal in the Federal Register – the daily official publication of federal rules, proposed rules and notices. Agencies take the comments into consideration before passing a final rule that will ultimately appear in the U.S. Code of Federal Regulations. Final rules can also be amended using the same process.
But the case of the Legacy Loans Program, one arm of the Treasury Department's newly-announced Public-Private Investment Program, is unusual. The program was created under an emergency provision in the FDIC charter that allows the Treasury secretary to determine whether there is a systemic risk to the economy. Using the provision, the FDIC can take action to avoid or mitigate systemic risk. So while the FDIC isn't bound to hold a comment process, the agency has chosen to do so to hear from the public on the program.
Legacy Loans Program
The Legacy Loans Program is aimed at getting rid of troubled assets and loans held by banks across the country. The market for many troubled assets, the root of the current economic crisis, has collapsed and the value of those assets has fallen sharply. The Treasury Department and the FDIC created the Public-Private Investment Program to rebuild that market, which would allow banks to sell those assets, free up capital and increase lending.
The government explored the option of purchasing the troubled assets directly, but officials felt that any price set would be too high. Instead, under the $500 billion to $1 trillion Legacy Loans Program, Treasury will partner with private investors by creating joint Public-Private Investment Funds that will pay for the troubled assets.
Under the program, the Public-Private Investment Funds would purchase troubled assets from the banks with financing from the Treasury, private investors and the FDIC. The Treasury Department and private investors would contribute equal amounts of equity financing; the rest of the financing would come from debt that was guaranteed by the FDIC. The debt guaranteed by the FDIC will be determined by the assets themselves, but it cannot exceed 6 times the amount of equity contributed by the Treasury and private investors. The FDIC would charge the funds a fee for the guarantee.
Potential investors in the funds may include a wide range of institutions, including mutual funds, pension plans, insurance companies, financial institutions, individuals, publicly managed investment funds, private equity funds, hedge funds and other long-term investors.
If a fund turns a profit, its returns are split equally between private investors and the government. However, if a fund loses money, the loss is first absorbed by the equity contributed by the Treasury and the private investors, and if those contributions are insufficient to cover the loss, the remainder is absorbed by the FDIC. Although private investors fully share the potential profit gains with the government, any losses are only limited to their initial equity contribution. The government bears most of the downside risk.
Proponents of the funds argue that the participation of private investors will help restart the market for troubled assets and help reveal the true prices of those assets. Critics, however, note that because private investors bear little downside risk, the funds will end up paying too much for those troubled assets. For more discussion, see this editorial by Joseph Stiglitz in The New York Times.
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This word cloud shows the most popular terms used from nearly all the 400-plus comments the FDIC received as part of its public comment process for the Legacy Loans Program. The larger the text, the greater number of times that term was used.Request for Comment
Just three days after the Legacy Loans Program was announced, the FDIC began accepting comments through a relatively short comment period that began on March 26 and ended on April 10. In its request, it outlined 17 questions, relating to everything from what type of asset should be sold, to whether the identities of participating investors should be made public.
Respondents suggested changes. Some drew diagrams. There were rants, and there were displays of gratitude, and cautiousness.
"We are grateful for the opportunity to comment on this program and look forward to helping the LLP be successful and beneficial for taxpayers, our communities, the federal government and the banking industry," wrote Joe Brannen, the President and CEO of the Georgia Bankers Association, which represents more than 350 commercial banks and thrifts.
"In our view, this could be an important tool for removing troubled loans that are prevent some of our member banks from supporting new lending in communities throughout Georgia."
In contrast, a blogger known as Dr. Housing Bubble cautioned the FDIC not to go through with the program.
"You are the absolute last line of defense from giving out a massive $500 billion to $1 trillion in handouts to perpetrators of this financial crisis… the program is marketed as a public and private partnership, but the massive downside potential is falling on the shoulders of the taxpayers," the blogger wrote. "In the end, taxpayers are fronting nearly 93 percent of the risk… When these loans start failing, as they will, the FDIC will suddenly become one of the biggest toxic mortgage holders... It is a recipe for another disaster."
Other comments offered tacit approval but cautioned the FDIC to tread carefully. Mark J. Tenhundfeld, director of regulatory policy at the American Bankers Association, said that his organization was concerned about the FDIC's "mission creep."
"The FDIC must not allow itself to become extended in activities beyond its traditional role of deposit insurer that in any way detract from… its primary and paramount deposit insurance responsibilities," Tenhundfeld wrote.
Tenhundfeld also recommended that banks be allowed to purchase pooled troubled assets of other banks to increase the number of bidders and the chance that such assets would be sold.
Bank of America's deputy general counsel, Gregory A. Baer, asked that the FDIC assure private investors that "once the core terms of the program are established, neither the FDIC nor the government bodies will engage in undue efforts to change the terms of the program. The financial community has witnessed punitive modifications to other government programs after they had been established, creating uncertainty and discouraging participation."
Baer also asked for the auctioned assets to include corporate loans, construction loans and revolving credit facilities – and not just real estate assets.
In contrast, a non-profit organization, the Center for Responsible Lending, recommended that the assets only include residential real estate assets, which are the source of the crisis.
The center also asked the FDIC to include President Obama's Home Affordable Modification Program, which expands the eligibility of home borrowers, in the Legacy Loans Program. It recommended that all loans and related assets sold or acquired through the LLP be subject to HAMP, and all institutions that sell loans or other assets through the program be required to participate in HAMP.
The Question of Transparency
One of the FDIC's questions to commenters was whether they thought investors' identities should be made publicly available. The responses were varied.
The Center for Responsible Lending said that transparency was essential "to ensure that homeowners can identify the ultimate owners of their mortgage loans, and that policymakers and independent analysts can meaningfully evaluate participants' performance under the Program."
But Richard Keck, a partner at the Duane Morris law firm, which represents the Flat Earth Capital private equity investment firm, said that investors' names should be held in confidence by the government.
"Investors typically have expectations of privacy in their investment decisions," Keck wrote. "Requiring them to forfeit those privacy interests as a condition to investing in the PPIFs is likely to discourage some investors and make it more difficult and costly to raise the necessary private equity." Ryan Bybee, a representative of the DBS private equity fund, said it didn't matter if their name was made public.
"No big deal, just don't demonize us if we make a buck or two, we are partners in this deal and we perform a necessary service for the public," Bybee wrote.
But Michael Hrebenar, president and CEO of NC Ventures in Stafford, Texas, said that making investors' information public could actually raise their profile.
"In fact, investors may receive new contacts from parties that read such publication (we have received numerous calls lately from businesses that saw our name on the Purchaser list), which may provide new business opportunities, which in turn would help the economy," Hrebenar wrote.
The FDIC will consider these and all other comments as it writes its final rule for the troubled asset auctions. While the FDIC isn't saying when the first of these auctions will take place, it could happen in the next few months.