Sunday, February 8, 2009

Entire Real Estate “Aggregator Bank,” Bailout Remains Murky

This Blog has been following the twisted path of the Real Estate Bailout for Six (6) Months. Even now the outlines of the “bailout,” remain murky. My initial belief (as did many other authors at the time) was that the Feds would create a 2nd RTC. This avenue seems to be closing in the new US Treasury administration.

From the selfish perspective of helping the local Georgia Real Estate Brethren obtain work in cleaning up this economic mess, I have looked for landing zone where the “2ndRTC,” will land – or make landfall – or make splashdown or materialize. It seems like it is not coming. That is, there will be no “2nd RTC.”

Though lost in the gloam of well-placed newspapers with only partial information, we only know the broadest of outlines of the coming Aggregator Bank. It appears the Feds will create an “Aggregator Bank,” and that Bank will become the repository of the “bad,” assets. How it acquires them and at what price is anyone’s guess. How it disposes of those assets is further muddied by the “price” of disposal. If disposal (sale) is to occur at “any market,” or “auction without reserve,” then the disposal will resemble the old RTC’s auction. This cannot work, unless the taxpayer is being set up to take a massive fall.

Consider: the Aggregator books assets at Good Bank’s book value; Good Bank gets an inflated value for its “toxic” asset from the US Treasury and moves on -- having ditched its toxic asset. The Aggregator Bank then holds the inflated toxic asset and sells it at a public auction. The loss (Inflated Book Value – Auction Price = Actual Loss). If the taxpayers paid the Good Bank its full “book value,” then the taxpayers will take a huge bath on the sale of the toxic assets.

To avoid a “firesale,” the Treasury may require the Aggregator Bank to hold the asset until the market recovers. However, this will place a significant additional “carry cost,” on the money fronted to the pay the Good Bank.

Work for Georgia lawyers and real estate professionals could come out of this model based on their ability to assist in the legal packaging, management, marketing and sale (or auction) of the toxic assets. However, my intuition (from reading the chards of information coming out of Washington) is that this Bank is going to be an inside job. The Aggregator Bank will tightly control the sale and tightly dole out the work. If you work for the Aggregator Bank or are a firm “picked” by it or Treasury to assist, then your firm may participate in the work out.

If not, then not – is my guess.

We will know the answer to the “professionals assisting the Aggregator Bank,” question when they issue the proposal in a few weeks. If there is no ability to bid on the work of the Aggregator Bank or offer proposals to assist the Aggregator Bank on the sale of assets, then we will have our answer.

Stay Tuned.

Hugh Wood
Atlanta, GA


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Relevant Clips from a recent February 9, 2009 WSJ are as follows:

Bank Bailout Plan Revamped
Treasury Secretary to Unveil Private-Sector Partnership to Buy Troubled Assets

Treasury Secretary Timothy Geithner is expected to announce that the government will become a partner with the private sector to purchase banks' troubled assets, according to people familiar with the matter.
The plan for a so-called aggregator bank, a variation on a theme that Obama administration officials have wrestled with for weeks, is among four main components of Mr. Geithner's bailout revamp, which he is expected to announce Tuesday.

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The administration hasn't settled on exactly how it will work and intends to hash out the structure with the private sector over the next few weeks, the people familiar with the matter said. Investors would likely buy a stake in the entity, which would then buy mortgage-backed securities and other troubled assets.

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The government would also be an investor, but the terms aren't yet decided. The entity might also raise funds by selling government-backed debt or through financing from the Fed, the people familiar with the matter said.
The Obama administration views the private bank as a way to get around the thorny issue of having to determine a price for soured assets such as certain mortgage-backed securities, many of which are illiquid and hard to value. The government has long worried that if it bought toxic assets and paid too much for them, banks would benefit at the expense of taxpayers -- while if the price was too low, it would force banks to take further write-downs and exacerbate their woes.

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The Treasury's working theory for the government/private-sector partnership is that investors wouldn't overpay, because if they did, they'd stand to lose money; but they also wouldn't underpay, since the selling banks wouldn't be willing to part with their assets too cheaply.

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A second round of cash injections in financial firms but with tougher terms, such as a requirement to modify troubled mortgages and better track the federal funds. The government is looking to get money into banks by buying preferred shares that convert into common shares in seven years; the idea is to avoid diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that have already received capital to convert the Treasury's preferred shares to common stock over time.
Giving the Federal Deposit Insurance Corp. power to help dismantle troubled financial firms beyond the depository institutions over which it now has authority. This could require legislation.

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Mr. Geithner, his predecessor Mr. Paulson and Fed Chairman Ben Bernanke have said there needs to be a government entity empowered to wind down failed financial institutions that aren't banks. Regulators have said one problem the government faced when Lehman Brothers Holdings Inc. and American International Group Inc. ran into trouble was that no federal body had authority to step in and steer the firms toward an orderly demise.

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Having the FDIC guarantee a wider range of debt that banks issue to fund loans is also a likely element of the plan, said people familiar with the matter. The guarantees could help free up credit to both companies and consumers. Currently, the FDIC temporarily backs certain debt with a three-year maturity. Government officials could increase this to maturities up to 10 years.

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-- Heidi N. Moore and Robin Sidel wrote the WSJ article
Write to Deborah Solomon at deborah.solomon@wsj.com and Damian Paletta at
damian.paletta@wsj.com

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Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084
www.woodandmeredith.com
hwood@woodandmeredith.com
Phone: 404-633-4100
Fax: 404-633-0068

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