In a public-private push which a top government official believes will be very profitable, the U.S. wants public input on how taxpayers should share profits with investors for a proposed program to buy hundreds of millions of dollars in loans which banks have so far been unwilling or unable to sell.
With the need to get credit flowing again to businesses and consumers, the U.S. this week outlined its plans to unfreeze markets. One half of the proposal has a priority to buy high risk mortgages and commercial real estate loans together with private investors and share the profit.
“We decided on a 50/50 split in the term sheet, but that is an area where we would like to submit some public input before we finalize,” Federal Deposit Insurance Company Chairwoman Sheila Bair said yesterday during a conference call with reporters, according to an FDIC transcript.
Bair acknowledged that letting private investors have a greater stake could help prices to better approach market values.
“You know, I think the trade-offs are with a greater share by private investors, you require the private sector having more skin in the game and so some will feel that will aid in the integrity of the pricing,” she said.
However she also saw that the private investors would be getting more of the profit on a program she believes will do very well.
“On the other hand, if this entity is profitable, and my personal view is I think it will be very profitable, you're giving more profit to the private investors, so -- and we're doing more lending to the private investors, too, or guaranteed lending to the private investors with a bigger equity share.
As part of the program, the FDIC will also be providing financing for the deals at a time in which banks have been hesitant to approve funding for deals which they believe were too risky.
She went on to justify the need for government involvement through the program, saying that the U.S. is trying remove the “liquidity premium” by creating a market for the assets where there is none currently.
They will be market prices. We're just trying to tease out the liquidity premium, she said.
What's weighing on market prices right now is that people can't get financing to buy assets, they can't get financing to buy assets not many people want to buy.
And then you have to hold on to them forever because there's nobody to sell them to ... [b]y providing that liquidity that's lacking now, we're hoping to get the prices up to what would really be a true market level.