Slicing the toxic pizza, an analysis of FDIC's Legacy Loans Program for receivership assets

Abstract

The Legacy Loans Program (LLP) is an elaborate way of slicing the Federal Deposit Insurance Corporation's (FDIC's) receivership assets. At best, the financial structure is irrelevant to the FDIC's expected long-run recovery rates. Yet, it may boost short-term prices by creating bond insurance liabilities that will come due several years down the road. If the private investor can increase the value of the toxic loans through non-contractible investments, then the public equity stake and subsidised leverage may hinder the FDIC from obtaining the best recovery rates from these troubled loan portfolios.