Publication: The New York Times
Published Date: 11/23/2010
By Ben Protess
Banks across the country are increasingly unloading toxic investments as stronger capital levels allow the institutions to clear their books, according to a report issued Tuesday.
In their last public appearance, in 2008, these assets crippled banks and the economy, causing more than 300 institutions to fail. Since then, banks have had a tough time purging their balance sheets of troubled commercial real estate and construction loans.
But in the last few months, banks sold more than $6 billion in so-called nonperforming assets, according to the report, published by the investment bank KBW. Banks have sold more than $16 billion in such assets so far this year, twice what they sold last year, said the report, which was based on regulatory filings from a diverse set of more than 200 banks.
The banks are selling the troubled assets, the report said, now that they have enough capital to withstand some losses. It also helps that the institutions have given up on the hope of turning a profit.
As banks have watched competitors begin to sell assets at a loss, “it’s a little harder to be in denial,” said the report’s author, Christopher McGratty. “Frankly, I think they want to get back to their bread-and-butter lending.”
Big players in the recent auctions include PacWest Bancorp and Fifth Third Bank, which recently sold $228 million of residential mortgage loans.
So who’s the proud new owner of these toxic loans? Private equity firms and hedge funds. Some companies have set up new funds just to buy troubled assets.
According to a recent article by our colleague Julie Creswell, hundreds of billions of dollars of bad investments are on the auction block. The Fortress Investment Group, which manages hedge fund and private equity investments, has coined the movement “the Great Liquidation.” Ms. Creswell also noted that potential buyers are lowballing the banks.
The firms are no doubt buying the assets on the cheap, but some banks are making out better than might be expected, according to the KBW report:
“We also found instances where companies recorded modest gains on disposition as the final sale price came in above where the company had initially marked the asset when moving it from the portfolio to nonperforming status.”