ARM Coalition Gears Up to Help in Second Round of TARP

A coalition of companies, including many accounts receivable management firms that had worked with the Resolution Trust Corporation in the 1980s and 1990s, met with government and banking officials on Tuesday to discuss how to handle the nonperforming and underperforming assets on financial institutions’ balance sheets.

Due to the success of the RTC, the coalition, USA Recovery Group LLC, is likely to recommend a similar structure -- an aggregator for the bad debt, commonly referred to as a “bad bank” -- for using the remaining $350 billion in TARP funds to resolve at least some of the bad assets.

Various news reports late Tuesday and early Wednesday said that the Obama administration is very close to announcing details of a bad bank to take on toxic assets. A CNBC report indicated that an announcement could come Wednesday and that the bad bank would take on $1 trillion in bad assets from financial institutions.

USA Recovery plans to work as a “special servicer,” providing services including debt collection, due diligence, loan underwriting, asset management and disposition, financial advisory, asset management, operational, and traditional specialist services to the agents the FDIC and the Treasury selects. The coalition was formed last fall when the Troubled Asset Relief Program (TARP) was announced (“ARM Industry Players Pushing for Role in $700 billion Bailout,” Oct. 23, 2008).

While not discussing the amount that might eventually be needed or the specifics of the proposal he would make at the meeting, Barry Fromm, CEO of Value Recovery Holdings and one of USA Recovery’s founding members said, “The issue is that we shouldn’t be reinventing the wheel. Nothing will be done without the creation of some type of oversight. Why pick something that hasn’t worked?”

The first tranche of TARP did nothing to dispose of bad assets, which the program had been designed for, so the second tranche will involve a lot more scrutiny and accountability, Fromm said.



“Companies [to buy the bad assets] are waiting for this to happen,” Fromm said. But in order for there to be uniformity in pricing, there needs to be a single overseer of the assets, like the RTC was for the thrift industry, according to Fromm.

A news report early Wednesday from Bloomberg News indicated that the Federal Deposit Insurance Corporation (FDIC) would manage the bad bank.

Fromm recommends marking to market the value of the assets to be disposed, which would be sold in different pools to public-private partnerships.

By using such partnerships, there’s incentive for buyers and benefit for the public if the assets are sold for more than their current value (after being marked to market), Fromm said, adding that the RTC was very successful in disposing of assets at gains.

Purchase of the failed assets in such a manner is very similar to the method used by creditors to retire bad debt, added Rozanne Andersen, ACA International executive vice president and general counsel.

“Leaving the debt on the books of the banks does not send the right message to the public,” Andersen said. “Buying the assets, shows that the government is addressing the issues and addressing them properly and will move to collect the debt in a responsible manner.

The collection industry has a definite role to play, Andersen added. “We can assist in the evaluation of the bad debt, looking at the likelihood and expected percentage of recovery. It will take an incredible amount of human resources to collect the debt.”

The collection industry has the human resources as well as the sophisticated technology to help the government, and by extension taxpayers, maximize their return on these failed assets, Andersen said.