Plans to create a “bad bank” to absorb the toxic assets of financial institutions have been welcomed by private equity real estate professionals – provided it doesn’t just “move pieces around the board”.
John Noell, a partner at Chicago-based law firm Mayer Brown and a veteran of the RTC crisis of the 1980s, said any attempt to establish market valuations, and stimulate deal flow, would be broadly welcomed by the industry.
However, the “devil would be in the detail”, he argued, insisting the success of the bank would depend on what happened to the “bad” assets, including troubled real estate assets and debts.
“The initial transaction of taking these assets off banks’ balance sheets would not create a true market price in itself. It’s success is dependent on what happens to those assets. If they are held then you are just moving pieces around the board,” Noell, who worked for JMB Realty during the savings and loans crisis of the 1980s, said.
According to a report in the Financial Times, Wall Street executives have been asked about the merits of creating a bank to buy the troubled assets of financial firms, in a bid to leave them free to concentrate on new lending.
It follows the US House of Representatives yesterday backing US President Barack Obama’s $825 billion stimulus package, despite not receiving a single Republican vote.
When the credit crisis first hit, private equity real estate professionals called for the creation of an RTC-type vehicle in an effort to keep the markets flowing.
Philip Feder, global chair of law firm Paul Hastings’ real estate group, said private equity real estate firms could be well positioned to help “manage” the assets of a bad bank, as well as investing in the underlying assets.
“The assets that were are dealing with today are different from the RTC days in that they are much more complicated. They are securitisations, pools of debts, that are much more difficult to understand and value. But they still need to be managed, and that’s where private equity can add value.”
The idea of a bad bank would be “fantastic” news for the industry as a whole, Feder added, with many firms eager to participate. “As always though it will all be about the implementation,” he said.