Federal Deposit Insurance Corporation Chairman Sheila Bair warned that there are inherent challenges regarding the speed of implementing the Obama administration's plan to stabilize the banking system by removing toxic assets from banks' balance sheets. Bair still praised the plan and discussed the FDIC's role as a supervisor and regulator of the loans.
The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets, Bair said in a statement. While there are inherent challenges to implementing a program of this magnitude quickly, the framework announced today provides the foundation upon which the FDIC will begin to build immediately.
The Treasury's plan involves using up to $100 billion in funds from the $700 billion financial rescue plan passed in 2008 in addition to capital from private investors to generate an estimated $500 billion to purchase the toxic assets, a number that could double to $1 trillion over time.
Banks will determine which loans they would like to sell, and the FDIC will subsequently determine the amount of funding that it can guarantee for the loans. The pools of loans will then be auctioned to the highest bidder, who will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
The buyer will then receive financing through issuing the FDIC-guaranteed debt, and the FDIC will receive a payment in return for its guarantee. The FDIC will provide oversight for the new funds to purchase assets from the banks.
The FDIC intends to move forward with this program in a methodical and transparent fashion, Bair said. We will provide the opportunity for public comment on critical aspects of the program prior to implementation.
The program is a creative and innovative way to address the financial crisis, Bair said.
The Legacy Loans Program, while providing substantial upside potential to private investors and the government, will also clear these troubled assets from banks balance sheets - enabling them to lend and restore economic growth, she added.
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