The government's plan could give banks of all sizes a chance to clean house. One prong of the program provides funding for investors to buy up pools of loans that contain things like mortgages, as well as credit card, auto and student loans. The government labels that part of the plan that the "legacy securities" program -- which is a nice way of saying "toxic securities."
Jon Arfstrom covers regional banks for RBC Capital Markets in Minneapolis. He said the securities-focused part of the plan is aimed mostly at big investment banks, which hold those complicated assets. But then there's what's called "the legacy loan" program. Arfstrom said it deals with residential and commercial mortgage debt. The "legacy loan" program also helps big banks.
"But some of the regional banks and some of the smaller community banks would have the benefit of participating," Arfstrom said.
Earlier drafts of the toxic asset purchase plan, first shaped by the Bush administration, paid less attention to smaller institutions' toxic assets. Joe Witt, head of the Minnesota Bankers Association, welcomes the change in strategy.
"I'm glad that the proposal specifically says that it is written to accept loans or securities from any sized financial institution," Witt said.
Witt said that 15 percent of Minnesota banks lost money at the end of 2008. He said that's due partly to declines in the value of banks' own investments, but it's also due to the kind of toxic loans that the government's program seeks to get off bank balance sheets.
"The question for us is whether the Minnesota banks have enough of these loans on their books to make it worthwhile," he said.
The way the Treasury Department is describing the process for these programs goes like this. The Federal Deposit Insurance Corporation or FDIC auctions off $100 of bad residential mortgage loans. Bidders in the marketplace would pay $84 for the pool of loans, and the original lender takes a small cut on the difference. The FDIC guarantees $72 worth of financing for that $84 loan pool. That still leaves a $12 gap, half of which would be paid for by Department of Treasury. Funds would come from a previously announced bank bailout program. The private investor pays the remaining $6.
Banking analyst Jon Arfstrom said so far, the investors for the program dealing with more complex securities -- the kind that hold all different kinds of debt -- will likely be big players.
"The legacy securities program will be run at least initially by five large money managers, so I think the option of playing in the securities and the securitization market will probably be reserved for some of the largest money makers in the country," Arfstrom said.
But Arfstrom said the "legacy loan" program -- the one that deals more specifically with mortgage debt -- will probably be open to a lot of investment funds.
"Certainly we'll be looking at it," he said.
Ty Schlobohm is managing director at Cherry Tree Companies, a Twin Cities-based asset management and investment banking firm. Cherry Tree runs a small hedge fund that invests in micro cap and small cap growth companies. Cherry Tree's focus is not in the mortgage debt that plays a big part of the government's program, but that may not stop them from pursuing it.
"With the government's backing in terms of additional capital, yes certainly I think it's something we would take a look at," Schlobohm said.
Schlobohm and some regional banks said they're all eager to see more details of the programs' rules.