The FDIC announced that it has signed a bid confirmation letter with Residential Credit Solutions (“RCS”), the winning bidder in a pilot sale of receivership assets that the FDIC conducted to test the funding mechanism for the Legacy Loans Program (the “LLP”).  The LLP is part of the Public-Private Investment Program (“PPIP”) announced in March 2009 by the Secretary of the Treasury, the FRB, and the FDIC, and is being developed to help banks remove troubled loans and other assets from their balance sheets.  For more on the PPIP, please see the March 24, 2009 Alert.  The transaction involves loans formerly held by Houston-based Franklin Bank SSB (“Franklin”), which failed in November 2008.  Under the terms of the transaction, the FDIC will set up a limited liability company (the “LLC”) and convey to it a portfolio of Franklin’s home loans with an unpaid balance of $1.3 billion.  In return, the FDIC will take a note for $727,770,000 from the LLC, which it will guarantee in its corporate capacity.  The FDIC anticipated that it will sell the note, which will have a 4.25% coupon funded by the cash flow from the mortgage portfolio, at a future date.  The FDIC will keep a 50% equity stake in the LLC, and will sell the other 50% stake to RCS, which will pay just over $64 million in cash.  After the closing, which is expected to occur before the end of September 2009, RCS will manage the portfolio and service the loans under the Home Affordable Modification Program guidelines.  The FDIC stated that, based on its analysis and assumptions, the present value of this bid equals 70.63% of the outstanding principal balance of this portfolio.  The FDIC called the transaction a test case that could be replicated soon, possibly in connection with another bank failure.  The FDIC also stated that it will analyze the results of this test sale to determine whether the LLP can be used to remove troubled assets from the balance sheets of open banks.

The Treasury, Federal Reserve Board and FDIC released a joint update on the Public Private Investment Program (”PPIP”).  Please find the entire release here (including the conflict of interest rules, FAQs, and letter of intent and term sheet):  http://www.financialstability.gov/latest/tg_07082009.html.  The key development in this update is the announcement of nine asset managers for the Legacy Securities Program (the “LSP”):

• AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
• Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
• BlackRock, Inc.;
• Invesco Ltd.;
• Marathon Asset Management, L.P.;
• Oaktree Capital Management, L.P.;
• RLJ Western Asset Management, LP.;
• The TCW Group, Inc.; and
• Wellington Management Company, LLP.

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The FDIC announced that development of the Legacy Loans Program (“LLP”) will continue, but that a previously planned pilot sale of assets by open banks will be postponed. The LLP is the portion of the Public-Private Investment Program that is intended, through the provision of FDIC debt guarantees and possibly Treasury equity co-investment, to attract private capital to purchase real estate loans that banks currently hold on their balance sheets. For a further discussion of the LLP, please see the March 24, 2009 Alert. In making the announcement, FDIC Chairman Sheila Bair stated, “Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.” As a next step, the FDIC will test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer. The FDIC expects to solicit bids for this sale of receivership assets in July 2009.

The FDIC is seeking comments on the Legacy Loans Program through April 10. The FDIC is posting the comments it receives at http://www.fdic.gov/llp/LLPcomments.html. The comments are updated daily.