WSJ: There has been some discussion about the federal government creating an “aggregator bank,” which would be a facility that could buy troubled assets from financial institutions. How would it work?
Ms. Bair: “The idea here is that the aggregator bank would buy the assets at fair value. Some are concerned that you’d have to mark the assets down to purchase them, but I think it could help provide some rational pricing, actually, for the market in some of these assets because we don’t have really any rational pricing right now for some of these asset categories.
The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank. So that would be an additional cushion against loss.
With a combination of private equity contributions plus tarp capital, I think you could leverage that into some fairly significant volume to purchase assets.”
WSJ: What would the aggregator bank do with the assets?
Ms. Bair: The aggregator bank could use multiple tools. It might want to hold some of the assets. It might make sense to just hold them for a while. You might want to securitize some of them. You could do a covered bond issue. I think there are lot of different strategies that could be used to get these assets back into the market.
WSJ: Why do regulators think it’s important to do address the assets?
Ms. Bair: I think everybody agrees it’s important to provide some troubled asset relief, because I think it’s key to getting private equity capital back into banks. They need to have some certainty about what the tail risk is on some of these assets. By doing the insurance wrap or providing a bank to just get them off the balance sheet complete, I think that would help us get some private capital back into banks.”
WSJ: What is the status of talks? Are they at a hypothetical stage?
Ms. Bair: It’s beyond hypothetical. I think all of the agencies are committed to coming up with a program for troubled asset relief. We’re vetting the various different structures, the pros and cons of those. I think we would all like to have something in place in the not too distant future. I’m hoping the decision making on it would be fairly quick. It has been discussed for some time. So I think we are nearing the point to make a decision. But it’s complicated. We want to make sure we get it right.”