New FDIC toxic asset plan: Sell the assets of failed banks

Now that the banks have their training wheels on -- now that they've shown they can raise private funds and clean up their balance sheets without depending on the FDIC's Legacy Loan Program (a.k.a., "toxic-assets program") -- the FDIC plans to use the TARP funds slated for the program to sell troubled assets of failed banks.

The revised program is expected to look something like the process developed for the Resolution Trust Corporation, which shut failed savings-and-loans in the 1980s and 1990s. Yesterday, it looked like the LLP may be dead. But it's not dead. It's just being reborn as something else.

The FDIC is expected to solicit the first bids in July to start assessing the details of the troubled-asset programs. The funds to be used are part of the Public-Private Investment Program, which President Obama announced in March as a centerpiece in his effort to shore up the financial system. Funding from the program will include $75 billion to $100 billion from TARP, which means the program won't have to be supported completely by the FDIC's insurance fund.

PPIP is a combination of federal money and funds raised from private investors. The combined funds would be used to buy troubled mortgage-backed assets. Banks balked at participating in the FDIC's toxic-assets program because they were concerned about government interference in the process. When PPIP legislation was passed, it included conflict-of-interest restrictions on buyers and sellers. Banks clearly want to get away from any kind of government interference, making applications to rid themselves of TARP completely.

But setting aside these funds to clean up the mess that the FDIC is already dealing with on failed banks' toxic assets makes more sense anyway. Why should we continue to fuel the big banks, which already have taken billions of dollars and still won't work with the government to free up consumer and small business credit access? Instead, the funds can be used more appropriately to prevent a problem with FDIC's insurance fund -- the true backbone of U.S. consumer deposit protection.

Lita Epstein has written more than 25 books, including Trading for Dummies and Reading Financial Reports for Dummies.
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