FDIC / Lennar / PPIP – Chris Pridgen

FDIC / Lennar / PPIP

Follow-Up Testimony

Congressional Hearing 5/16/2012

House of Representatives

Financial Services Committee

Oversight And Investigations Sub-Committee


Prepared By:

Chris Pridgen
Monteagle Development, Inc.
Atlanta, GA
770-649-8527 office
[email protected]

American Land Rights Association
Chuck Cushman, Executive Director
PO Box 400
Battle Ground, WA 98604
(360) 687-3087
[email protected]
[email protected]



Statements and Rebuttal

Statements and Rebuttal



1. Wikipedia presentation on TARP and TARP requirements
2. Joint Press Release Treasury / Federal Reserve, FDIC March 23, 2009
See 2nd e-mail for press releases and 3rd party reports on TARP and funds use.
3. Excerpts from FDIC / MULTIBANK / RIALTO Loan Contribution and Sale Agreement
4. Excerpts from UCC Article 3 (Holder in Due Course)
5. Excerpts from UCC Article 9 (Secured Transactions)
6. Excerpts from 12 USC 1821(e) FIRREA
7. Least Cost Resolution Mandate Explanation / Discussion
8. Proposed Preferred Least Cost Resolution Amendment to FIRREA
9. Letter Testimony to Congress February 23, 2012. (Monteagle Development, Inc.)





The following is an executive summary of the issues and activities of the FDIC and related partners in the PPIP Legacy Loan Program.  It is a complicated subject and does not lend itself to a surface level review.  Nonetheless, the following is an attempt to simplify and clarify the issues and reality of the FDIC’s activities, their impact on the American people and borrowers of failed banks.  After the summary, this presentation will provide a list of action items that we respectfully request Congress consider to protect the citizens so negatively impacted by the tragedy imposed by the Federal Agency.


The FDIC has resorted to various maneuvers to avoid Congressional oversight and to use tax payer money in an attempt to take assets from the borrowers / guarantors injured by the failure of their communities’ financial institutions, for the profit of the Agency and a publicly-traded company.

The FDIC has been supported in this endeavor by Secretary Geitner and the US Treasury.  TARP has been so contentious, that the FDIC and Treasury have gone to unprecedented efforts to obfuscate, confuse and avoid detection and the consequences of same, to use tax payer money to bail out the FDIC, to claim the money was not related to TARP, to avoid the requirements of using tax payer dollars imposed by TARP, to avoid Congressional approval / disapproval / oversight and to deny the American tax payer of any return on the use of the Peoples money.

All this despite numerous public announcements by both Agencies and third-party reports that $75-$100 Billion Dollars of TARP money was reserved to fund the PPIP Legacy Loan (FDIC) and Legacy Securities (US Treasury) programs.  All this despite the FDIC’s press release (March 2009) that the money was available to buy toxic assets from banks and directly from the FDIC.  Don’t forget that Treasury Secretary Geitner extended TARP funding through October 2010.  The Rialto / Lennar PPIPs closed / funded February 9, 2010.



The FDIC has not been forthright in the origin of the funds borrowed by Multibank (PPIP with Lennar / Rialto and others for that matter), despite published reports that the money was borrowed from the US Treasury and then made available to the note purchaser thru the FDIC Receiverships, as a loan from the FDIC Receiverships to the Note Purchaser Multibank.


Perhaps they used their Line of Credit with the US Treasury that was expanded from $30 Billion to $500 Billion (approximately May 2009).  FDIC Director Sheila Bair in an multiple interviews (August and September 2009) indicated that the Agency was very close to drawing on their Line of Credit at the Treasury for the first time in decades.  This announcement pre-dates their use of leverage in the PPIP Legacy Loan program buying loans directly from the FDIC (September 30, 2009).

The FDIC is empowered by the FDI Act, FIRREA and now the Dodd-Frank Act to backstop depositors funds using insurance premiums paid by American banks and to pursue the Least Cost Alternative to the resolution of failed bank assets, which includes primarily loans of the failed banks.
If they meet these objectives, they are given great statutory powers (TO INCLUDE REPUDIATING / BREACHING CONTRACTS / LOANS AT THE AGENCY’S SOLE DISCRETION) and discretionary leeway to determine the process most effective to accomplish these objectives.  However, their process of bank failure into receivership and then selling assets into PPIP’s is demonstrably not the Least Cost Resolution and not the only alternative to resolving the assets.

The problem with the bureaucracy is that it replaces the ability to think and adjust by reducing it to a rigid standard operating procedure that rolls on without abatement regardless of the result or its impact on the American people.  It should also be noted that Dodd-Frank while further consolidating power in the hands of the FDIC, prohibits the FDIC receivers / Agency from taking an equity position in the hedge funds or entities purchasing loans from the FDIC or its receiverships in the future.  Obviously Congress has found fault with the Lennar / Rialto PPIP structure and others and has moved to prevent it’s duplication in the future.  So what do we do now with the PPIPs so structured that are damaging the entire country and the economy as we speak?




Now here is where it gets interesting.  Not all but many of the loans in the PPIPs with Rialto / Lennar involve loans repudiated / breached by the FDIC as Receiver for the failed bank.  Given the ability to breach contracts is provided to the FDIC by statute, the statute provides for the borrower to have a claim for damages against the receivership.  Federal case law has decided that borrowers of a failed bank “have a right to funding vested” in the loan, by the FDIC Receivership, if the loan was being funded by the bank at the time of its failure.

If the FDIC repudiates, statute provides the borrowers a claim for damages against the receivership.  Therefore, if the borrower has a right to claims for damages due to breach by the receiver, then the Guarantees of the borrower’s principals attached to the loan fail for lack of consideration.  In other words, if the receiver breaches and default by law goes to the receiver / now lender, then the borrower did not get the benefit contracted and paid for in the loan and the guarantors, therefore, are relieved of their guaranty as a result.  It is interesting to note the the FDIC’s own website under Q&A for borrowers of a failed bank specifies that your loan terms will not change because they are agreed to contractually.

By packaging the loans and selling them off to a note purchaser, they are attempting to do indirectly (by creating a new notehholder) what their super statutes would deny them directly.  The FDIC routinely uses third-party contractors to separate themselves from the assets directly.  It provides cover, plausible deniability for their own directives.  They are doing the same thing with the PPIP program.

Consider the Loan Contribution and Sale Agreement governing the note sold, attached as an exhibit hereto in relationship to FDIC / Lennar testimony given 5/16/2012.

Stuart Miller, CEO Lennar, in his testimony before Congress on 5/16/2012, stated that they (Lennar / Rialto) were awarded a partnership in which “the FDIC defined the documents, proof of assets, structural finance terms, fees and relationship with the manager and that they (Lennar / Rialto) bid on that basis.”

Here is the layman’s translation: they (the FDIC) did it not us.  Miller basically throws the FDIC under the bus for structuring the deal and its requirements, drafting the documents and all terms related to the deal.  OK, that appears to be a true statement on Miller’s part.  However, he becomes evasive when questioned about why Lennar / Rialto has demonstrated time after time the preference to sue rather than negotiate or work-out a reasonable settlement first.  Miller states that “From PNL (pre-negotiation letter) thru every negotiation, they engage with or without counsel, respectfully.”

When Congressman Westmoreland questioned FDIC Director of Asset Resolution Edwards about a letter the Agency sent to witness Scott Leventhal, the Agency responded this way:

Congressman Westmoreland:  Excerpt of Letter from FDIC to Scott Leventhal: “The FDIC does not manage or service the assets conveyed to Rialto or anyone else.  The FDIC is not in a position to control a resolution strategy owned by the LLC.”  Congressman Westmoreland asked Director Edwards “Do you mean to tell me that the FDIC, with a 60% interest in the note purchaser does not have any say in the notes or how they are collected?”

FDIC Director Edwards: “No, I wouldn’t say that, our oversight process ……….. It would not be a true sale if the FDIC was involved in the day to day decisions and why these transactions are structured this way.”

The Director’s response was disingenuous and misleading.  He is correct, that if the seller of the notes imposed conditions upon the sale or maintained any reversionary interest in the notes or continued to influence the note holder’s actions post sale – then it is not and cannot be a true sale of the notes under the law.  However, a simple review of the Loan Contribution and Sale Agreement (which was crafted by the FDIC per Stuart Miller’s testimony) clearly demonstrates that the loan sale came with big strings and penalties attached, provides for a reversionary interest to the note seller (FDIC) and does indeed contractually require very specific actions and behavior from the note purchaser and its members, including Lennar / Rialto and the manager they control as a condition of purchase and participation in the PPIP.

Director Edward’s response and the Loan Contribution and Sale Agreement are problematic for 4 reasons:

A.  Director Edwards’ response is an attempt to mislead and or confuse Congress and the Oversight

B.  The terms of the sale destroy the note purchaser from being a “Holder in Due Course.”  The terms
in fact demonstrate that the note purchaser, Multibank and its partners merely purchased the rights
to payment or payment intangibles.  Therefore, under Article 3 HOLDER IN DUE COURSE, the
note purchaser acquires no rights under the statute and the note purchaser has only the rights of a
partial assignee.

Article 9 SECURED TRANSACTIONS (9.608 and 9.615) specifically state that if the under-lying
transaction is the sale of payment intangibles or a promissory note, the Debtor (borrower) is not
entitled to any surplus derived of collateral and the Obligors (Guarantor) are not liable for any
deficiency.  UCC 9, amended in 2002, contemplates the result if a note purchaser is not a Holder
in Due Course and is only an assignee of payment rights.

Basically, the assignee to payment rights is entitled to the proceeds of collateral or the collateral itself but does not gain the right to pursue Guarantors, as they are no longer liable for any deficiency by statute.  SO WHY IS LENNAR / RIALTO THREATENING EVERYONE IN COURT AND ATTEMPTING AND SUCCEEDING IN FORCING INDIVIDUALS INTO BANKRUPTCY OR TAKING THEIR ASSETS?

In part because UCC 9.608 and 9.615 have not been widely adjudicated in court and therefore, there is little case law for these parts of the code. The rest of the reason is that Lennar / Rialto under
the FDIC’s written directives in the Loan Contribution and Sale Agreement seek to confuse and
confound the court by not recognizing repudiation on the part of the receiver and use the court
system to change the game against borrowers and to force them into submission financially or file
bankruptcy and they are using tax payer dollars to fund their expenses associated with suing.

C. The Loan Contribution and Sale Agreement is the document that clearly defines in writing what the FDIC requires as a condition of purchasing the note and receiving the other benefits associated with the PPIP.  This document specifies that:

• Section 2.6:  That the FDIC will fund any deficiency realized by the note purchaser on selling the under-lying collateral.  Therefore, the FDIC’s loss is increasing not decreasing as required by the Least Cost Resolution, which is required by their authority from Congress and the note purchaser has absolutely no risk in the assets purchased provided they do the FDIC’s bidding.  Further the FDIC’s cost in the assets will undeniably increase as a result, since the loan balances are increased for default interest, legal fees, court costs, etc as these loans languish unresolved for 3-5 years in court.

• Sections 6.1:  specify that the note purchaser may sell the loan back to the FDIC if the under-lying borrowers/ guarantors file a no asset bankruptcy or if the borrower / guarantors achieve an unappealable legal decision from a court of competent jurisdiction that the note and or guaranty are unenforceable.

Section 6.4 specifies in writing what actions the manager of the note holder must take or not  take in order to preserve its privileges and benefits under the agreement.  The language is an  exhibit to this presentation.  Paraphrased, it says that the note-holder or its manager may not  enter into any forbearance agreement or short sale with the borrower; they may not take any  action that is contrary to the collection standard of the Operating Agreement and must preserve  the collection of payments and requirement of same from borrowers; they may not foreclose,
they may not initiate any lawsuit except for a lawsuit to force payment in full.





D. The written terms of the Loan Contribution and Sale Agreement, provided by the FDIC as note seller, clearly demonstrate that the FDIC entered into the contract (which was beyond the borrower / guarantor’s control) as lender without Good Faith, which is required by the Uniform Commercial Code. Good Faith is an absolute requirement of a valid contract and cannot be waived per the federal statute. Therefore, the FDIC entered into the contract without Good Faith and destroyed any semblance of Good Faith as demonstrated by the written requirements of the Loan Contribution and Sale Agreement written by the FDIC, which should invalidate the loan contracts between the parties.


SUMMARY:  The FDIC and their partners have actively attempted to avoid the real issues and obscure the truth before Congress while using tax payer dollars to profit and benefit for their individual interests at the expense of the American tax payer and the borrowers injured as a result of their bank’s failure.

The FDIC was aided and abetted by the US Treasury, another federal agency, in gaming the system.

The FDIC and their partners are damaging the market and the recovery of the local economies involved with their activities, meaning everyone, tax payers, borrowers and non-borrowers, everyone suffers.

At best the FDIC tries to hide behind an undefined directive in their charter to do whatever they feel like if they and the US Treasury say it is a financial emergency and therefore, OK (they cannot be allowed to circumvent Congress and Congressional approval) and at worst, their activities are a complete bastardization of the American legal system and an attack on the very tax payers and citizens Congress was elected to protect and serve.

Please impose a moratorium on the collection lawsuits and various collection activities of the FDIC and all Legacy  Loan PPIPs, including Lennar / Rialto, until Congress can sort this out and find an equitable solution for all concerned to this mess, that the FDIC created.



• Impose Oversight Committee moratorium on FDIC / PPIP collection activities and lawsuits pending full disclosure and review of results of Congressional investigation by Congress.

• Audit FDIC use of tax payer dollars to fund PPIP Legacy Loan activities and publish report.

• Organize committee members to explore and impose an equitable resolution to restore and compensate borrowers of failed banks for damages imposed by FDIC / PPIP program.

• Enforce requirement of Dodd- Frank prohibiting the FDIC and receivership from taking an equity position in notes sold to third-parties.

• Consider Preferred least Cost Resolution Amendment to existing statutes empowering the FDIC and resolution of failed banks, at least for community banks of limited franchise value.
Statements and Rebuttal

Statements Stuart Miller, CEO Lennar:

Confirmed that “the FDIC defined the documents, proof of assets, structured the finance terms, fees and relationship with the manager and they (Lennar / Rialto) bid on that basis.”  Certainly appears to be a true statement but the terms of the agreement drafted by the seller of the notes prevents Multibank or the entities they transfer the notes to from being a Holder in Due Course.  See the Exhibits for Loan and Contribution Agreement and UCC Article 3 and Article 9 explanations.

Mr Miller stated that the portfolios were predominately defaulted loans, which depleted bank capital and then the banks failed and were seized.   That’s mighty condescending that he is judge jury and executioner. What about all the loans repudiated / breached by the FDIC as Receiver?  They are defaulted but not by the Borrowers.  Moreover those defaults occurred after the bank failed and the notes were in the FDIC’s hands.  FIRREA 12 USC 1821 (e) states that when the FDIC as Receiver repudiates a loan, the default goes to the Receiver, gives the Borrower a claim for damages as of the day the Receiver was appointed and therefore, the obligations of the parties becomes fixed as of that day as well.

By extension, if the Borrower has a claim for damages as a result of breach by the Receiver, the personal guarantees fail (become unenforceable) due to lack of consideration by Lender to Borrower.

So for all of the Borrowers that were repudiated and not provided the funding under the loan, for which they paid substantial fees and interest to the Lender prior to failure because the Receiver repudiated the loan and refused to complete funding, Mr. Miller’s statement is completely false in their cases and misleading at best.

Mr. Miller stated that Rialto invested $250 Million cash and would not receive any money back until loan was repaid.  That may be true from an accounting perspective as those funds were placed in a Defeasance Account at Wells Fargo, but Rialto is certainly getting paid a management fee and press releases from Miami clearly crow long and hard about how much money Lennar is making on its Rialto subsidiary every quarter.  The money they borrowed from Treasury is in fact paying all expenses to sue Borrowers and Guarantors and Rialto’s management fee.  One-half point on $3.02 Billion (the management fee) is a big number every year.

Statements and Rebuttal

Statements Bret D. Edwards, FDIC:

Confirms that Multibank’s financing used Purchase Money Notes.

Purchase Money Notes represented partial payment of the assets sold by receiverships to Multibank.

Stated that the Purchase Money Notes did not finance any of Rialto’s 40% interest.  Not true.  See clarification to Letter Testimony in Exhibits.

Stated that partner paid cash for its 40% interest. Cash paid only covered one-half of the value of assets acquired.  See clarification to Letter Testimony in Exhibits.

States that when banks with limited franchise appeal fail and no other bank wants to buy it, then the structured sale format is used so they do not have to sell assets (notes and collateral) at less than their intrinsic value.   Not the only solution.  See Preferred Least Cost Resolution Amendment in Exhibits.

Stated that the financing provided was needed to insure “robust bidding for the assets”.  Who are they kidding, even giving Rialto credit for $243 Million Cash Paid for their interest, it’s still only 20 cents on the dollar had they sold the notes and walked away.  Further they have by the terms of their agreement guaranteed Rialto a profit provided they do the FDIC’s bidding.

Congressman Westmoreland attributed the following statement to the FDIC previously, citing a letter sent to witness Scott Leventhal: “ Although the FDIC holds an equity interest in the LLC, the FDIC does not manage or service the assets conveyed to Rialto or anyone else.  The FDIC is not in a position to control a resolution strategy owned by the LLC.”  Congressman Westmoreland then asked FDIC Director Edwards, (paraphrased) “you mean to tell me that with a controlling interest of 60% you have no say in how the assets are managed.”

Director Edwards responded by saying: “ I wouldn’t say that, our oversight process ……. It would not be a true sale if the FDIC was involved in the day to day decisions and why these transactions are structured this way.”       The loan sale documents drafted by the FDIC demonstrate conclusively that the FDIC does in fact exert control over the resolution of assets post sale by virtue of the written terms of the agreement creating a conditional sale and limitations on the note purchaser, who is not free to resolve or collect the notes without interference from the Seller (FDIC).  Further this means that Multibank per the Uniform Commercial Code is only a partial assignee of the notes and is not a Holder in Due Course and only entitled to realize on collateral.

See Loan Contribution and Sale Agreement in Exhibits.  See the UCC Article 3 and 9 Exhibit.



• What was the origin of the money loaned by the FDIC receiverships to Multibank and other note purchasers in the FDIC controlled PPIP program?

• Was the money loaned by FDIC receiverships to Multibank, in fact derived from the US Treasury and therefore, tax payer money?

• Why was the American tax payer not given a reasonable rate of return (interest) and or an equity stake in the borrowing entity as required by TARP?

• Why was Congressional approval not sought for the use of tax payer dollars, if the funds used were obtained outside of the funds reserved under TARP?

• Why did the FDIC guarantee an undefined amount of money as a Federal Agency without authorization or appropriation from Congress?

• The FDIC’s own documentation (Loan Contribution and Sale Agreement) demonstrates that the FDIC is unwilling to work with borrowers of failed banks.  Why does the FDIC not recognize that the borrowers of the failed banks have been irrepairably damaged by the bank’s failure and seek to work cooperatively with them to resolve the loan contract?

• Why does the FDIC treat borrowers of failed banks with disdain and disregard?

• Why does the FDIC require their surrogates to treat the borrowers of failed banks with disdain and disregard?

• Why does the FDIC ignore their Congressional Least Cost Resolution mandate by implementing a process that demonstrably increases the FDIC’s cost of resolving assets and thereby invalidates the FDIC’s authority granted per statute?




Wikipedia presentation on TARP and TARP requirements

Troubled Asset Relief Program
From Wikipedia, the free encyclopedia
TARP allows the United States Department of the Treasury to purchase or insure up to $700 billion of “troubled assets,” defined as “(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”[4]

The Emergency Economic Stabilization Act of 2008 (EESA) requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure is designed to protect taxpayers by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if the financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery.[5]



TARP will operate as a “revolving purchase facility.” The Treasury will have a set spending limit, $250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the “coupons.” The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets. The initial $250 billion can be increased to $350 billion upon the president’s certification to Congress that such an increase is necessary.[6]

The remaining $350 billion may be released to the Treasury upon a written report to Congress from the Treasury with details of its plan for the money. Congress then has 15 days to vote to disapprove the increase before the money will be automatically released.[5]

The first $350 billion was released on October 3, 2008, and Congress voted to approve the release of the second $350 billion on January 15, 2009. One way that TARP money is being spent is to support the “Making Homes Affordable” plan, which was implemented on March 4, 2009, using TARP money by the Department of Treasury. Because “at risk” mortgages are defined as “troubled assets” under TARP, the Treasury has the power to implement the plan. Generally, it provides refinancing for mortgages held by Fannie Mae or Freddie Mac. Privately held mortgages will be eligible for other incentives, including a favorable loan modification for five years.[7]

Timeline of changes to the initial program
On October 14, 2008, Secretary of the Treasury Henry Paulson and President Bush separately announced revisions to the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants from the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: “(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.”[10] The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using the first $250 billion allotted to the program.[11]
The first allocation of the TARP money was primarily used to buy preferred stock, which is similar to debt in that it gets paid before common equity shareholders. This has led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently.[12][13]
In the original plan presented by Secretary Paulson, the government would buy troubled (toxic) assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan was scratched when Paulson met with United Kingdom’s Prime Minister Gordon Brown who came to the White House for an international summit on the global credit crisis.[citation needed] George Soros claims he had language

inserted into the bill at the last minute which permitted this, then once the bill was passed and signed, lobbied for the changes that occurred.[14][15] Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, merely infused capital into banks via preferred stock in order to clean up their balance sheets and, in some economists’ view, effectively nationalizing many banks. This plan seemed attractive to Secretary Paulson in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money.[citation needed]
On November 12, 2008, Secretary of the Treasury Henry Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment.[16][17]
On December 19, 2008, President Bush used his executive authority to declare that TARP funds may be spent on any program that Secretary of Treasury Henry Paulson,[18] deemed necessary to alleviate the financial crisis.
On December 31, 2008, the Treasury issued a report reviewing Section 102, the Troubled Assets Insurance Financing Fund, also known as the “Asset Guarantee Program.” The report indicated that the program would likely not be made “widely available.”[19]
On January 15, 2009, the Treasury issued interim final rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program (CPP).[20]
On January 21, 2009, the Treasury announced new regulations regarding disclosure and mitigation of conflicts of interest in its TARP contracting.[21]
On February 5, 2009, the Senate approved changes to the TARP that prohibited firms receiving TARP funds from paying bonuses to their 25 highest-paid employees. The measure was proposed by Christopher Dodd of Connecticut as an amendment to the $900 billion economic stimulus act then waiting to be passed.[22]
On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the remaining $300 billion or so in TARP funds. He intended to direct $50 billion towards foreclosure mitigation and use the rest to help fund private investors to buy toxic assets from banks. Nevertheless, this highly anticipated speech coincided with a nearly 5 percent drop in the S&P 500 and was criticized for lacking details.[23]
On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced a Public-Private Investment Program (P-PIP) to buy toxic assets from banks’ balance sheets. The major stock market indexes in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way.[24] P-PIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from bank’s balance sheets. The Federal Deposit Insurance Corporation (FDIC) will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and the U.S. Treasury will provide the remaining assets.

The second program is called the legacy securities program, which will buy residential mortgage backed securities (RMBS) that were originally rated AAA andcommercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which are rated AAA. The funds will come in many instances in equal parts from the U.S. Treasury’s TARP monies, private investors, and from loans from the Federal Reserve’s Term Asset Lending Facility(TALF). The initial size of the Public Private Investment Partnership is projected to be $500 billion.[25] Economist and Nobel Prize winner Paul Krugman has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks’ shareholders and creditors.[26] Banking analyst Meredith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs.[27] Economist Linus Wilson, a frequent commenter on TARP related issues, also points to excessive misinformation and erroneous analysis surrounding the U.S. toxic asset auction plan.[28] Removing toxic assets would also reduce the volatility of banks’ stock prices. This lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.[29]
On April 19, 2009, the Obama administration outlined the conversion of Banks Bailouts to Equity Share.[30

Administrative structure
See also: Oversight of the Troubled Asset Relief Program

Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements
Protection of taxpayer investment
1. Equity stakes
1. The Act requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure is designed to protect taxpayers by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if the financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery.[5]

2. Limits on executive compensation
1. The Act sets some limits on the compensation of the five highest-paid executives at companies that elect to participate significantly in TARP. The Act treats companies that participate through the auction process differently from those that participate through direct sale (that is, without a bidding process).
1. Companies who sell more than $300 million in assets through an auction process are prohibited from signing new “golden parachute” contracts (employment contracts that provide for large payments upon termination) with any future executives. It will also place a $500,000 limit on annual tax deductions for payment of each executive, as well as a deduction limit on severance benefits for any golden parachutes already in place.[5]
2. Companies in which the Treasury acquires equity because of direct purchases must meet tougher standards to be established by the Treasury. These standards will require the companies to eliminate compensation structures that encourage “unnecessary and excessive” risk-taking by executives, provide for claw-back (forced repayment of bonuses in the event of a post-payment determination that the bonuses were paid on the basis of false data) of bonuses already paid to senior executives based on financial statements later proven to be inaccurate, and prohibit payment of previously established golden parachutes.[5]
3. Recoupment
1. This provision was a big factor in the eventual passage of the EESA. It gives taxpayers the opportunity to “be repaid.” The recoupment provision requires the Director of the Office of Management and Budget to submit a report on TARP’s financial status to Congress five years after its enactment. If TARP has not been able to recoup its outlays through the sale of the assets, the Act requires the President to submit a plan to Congress to recoup the losses from the financial industry. Theoretically, this prevents TARP from adding to the national debt. The use of the term “financial industry” in the provision leaves open the possibility that such a plan would involve the entire financial sector rather than only those institutions that availed themselves of TARP.[5]
4. Disclosure and Transparency
1. Though the Treasury will ultimately determine the type and extent of disclosure required for participation in the TARP, it is clear that these requirements will be extensive, particularly with respect to any asset acquired by TARP. It seems certain that institutions who participate in TARP will have to publicly disclose information pertaining to their participation, including the amount of assets they sold to TARP, what type of assets were sold, and at what price. More extensive disclosure may be required at the discretion of the Treasury.[5]
2. The Act also seems to give a broad mandate to the Treasury to determine, for each “type” of institution that sells assets to TARP, whether the current disclosure and transparency requirements on the sources of the institution’s exposure (such as off-balance sheet transactions, derivative instruments, and contingent liabilities) are adequate. If the Treasury finds that a particular institution has not provided sufficient disclosures, it has the power to make recommendations for new disclosure requirements to the institution’s regulators, which will probably include foreign-government regulators for those foreign financial institutions that have “significant operations” in the United States.[5]
5. Judicial Review of Treasury Actions
1. The Act provides for judicial review of the actions taken by the Treasury under the EESA. In other words, the Treasury may be taken to court for actions it takes pursuant to the Act. Specifically, Treasury actions may be held unlawful if they involve an abuse of discretion, or are found to be “arbitrary, capricious . . . or not in accordance with law.” However, a financial institution that sells assets to TARP is cannot challenge the Treasury’s actions with respect to that institution’s specific participation in TARP.[5]



Various Press Releases Regarding PPIP and TARP Funds SEE SEPERATE E-MAIL
FDlC: Press Releases – PR-121-2009 07/8/2009 – •. 5/10/12 2:36 PM
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Joint Statement by Secretary of the Treasury Timothy F. Geithner,
Chairman of the Board of Governors of the Federal Reserve System
Ben S. Bemanke, and Chairman of the Federal Deposit Insurance
Corporation Sheila Bair
Contact: Andrew Gray (202) 898-7192
Legacy Asset Program
To view the Letter of Intent and Term Sheets, please visit link – PDF 417K
(PDF Help).
To view the Conflict of Interest Rules, please visit link – PDF (PDF Help).
To view the Legacy Securities FAQs, please visit link – PDF (PDF Help).
The Financial Stability Plan, announced in February, outlined a framework to
bring capital into the financial system and address the problem of legacy real
estate-related assets.

On March 23, 2009, the Treasury Department. the Federal Reserve, and the
FDIC announced the detailed designs for the Legacy Loan and Legacy
Securities Programs. Since that announcement, we have been working jointly
to put in place the operational structure for these programs, including setting
guidelines to ensure that the taxpayer is adequately protected, addressing
compensation matters, setting program participation limits, and establishing
stringent conflict of interest rules and procedures. Recently released rules
are detailed separately in the Summary of Conflicts of Interest Rules and
Ethical Guidelines.

Today, the Treasury Department, the Federal Reserve, and the FDIC are
pleased to describe the continued progress on implementing these programs
including Treasury’s launch of the Legacy Securities Public-Private
Investment Program.  Financial market conditions have improved since the early
part of this year, and many financial institutions have raised substantial amounts
of capital as a buffer against weaker than expe9ted economic conditions.

While utilization of legacy asset programs will depend on how actual economic
and financial market conditions evolve, the programs are capable of being quickly
expanded if these conditions deteriorate. Thus, while the programs will
initially be modest in size, we are prepared to expand the amount of
resources committed to these programs.

Legacy Loan Program
In order to help cleanse bank balance sheets of troubled legacy loans and
reduce the overhang of uncertainty associated with these assets, the FDIC
and Treasury designed the Legacy Loan Program alongside the legacy
Securities PPIP.

The Legacy Loan Program is intended to boost private demand for distressed
assets and facilitate market-priced sales of troubled assets. The FDIC would
provide oversight for the formation, funding, and operation of a number of
vehicles that will purchase these assets from banks or directly from the FDIC.
Private investors would invest equity capital and the FDIC will provide a
guarantee for debt financing issued b¥ these vehicles to fund asset
purchases; The FDIC’s guarantee would be collateralized by the purchased
assets. The FDIC would receive a fee in return for its guarantee. I

On March 26, 2009, the FDIC announced a comment period for the Legacy
Loan Program, and has now incorporated this feedback into the design of the
program. The FDIC has announced that it will test the funding rnechanism
contemplated by the LLP in a sale of receivership assets this summer. This
funding mechanism draws upon concepts successfully employed by the
Resolution Trust Corporation in the 1990s, which routinely assisted in the
financing of asset sales through responsible use of leverage.

The FDIC expects to solicit bids for this sale of receivership assets in July. The
FDIC remains committed to building a successful legacy Loan Program for open
banks and will be prepared to offer it in the future as needed to cleanse bank
balance sheets and bolster their ability to support the credit needs of the
economy. In addition, the FDIC will continue to work on ways to increase
utilization of this program by open banks and investors.


Congress created the Federal Deposit Insurance Corporation in 1933 to
restore public confidence in the nation’s banking system. The FDIC insures
deposits at the nation’s 8,246 banks and savings associations and it I
promotes the safety and soundness of these institutions by identifying, I
monitoring and addressing risks to which they are exposed. The FDIC
receives no federal tax dollars insured financial institutions fund its

FDIC press releases and other information are available on the Internet at
www.fdic.gov, by subscription electronically (go towww.fdic.gov/aboutlsubscriptions/index.html)

Excerpts from FDIC / MULTIBANK / RIALTO Loan Contribution and Sale Agreement

Multibank Structured Transaction 2009-1 RES-ADC
Execution Version
Dated as of February 9, 2010
Multibank Structured Transaction 2009-1 RES-ADC
Loan Contribution and Sale Agreement

Section 2.6 Interest Conveyed.  In the event a foreclosure occurs after the Cut-Off
Date, or occurred on or before the Cut-Off Date but the Redemption Period had not expired on or
before the Cut-Off Date, the Initial Member shall convey to the Company the Deficiency
Balance, if any, together with the net proceeds, if any, of such foreclosure sale. If the Initial
Member was the purchaser at such foreclosure sale, the Initial Member shall convey to the
Company the Deficiency Balance, if any, together with a special warranty deed to the Receiver
Acquired Property purchased at such foreclosure sale. The Company acknowledges and agrees
that the Company shall not acquire any interest in or to (a) any such Underlying Collateral that
was foreclosed by the Initial Member or any of its predecessors-in-interest on or before the Cut-
Off Date and for which the Redemption Period, if any, had expired on or before the Cut-Off Date
and (b) any performance or completion bond or letter of credit or other assurance filed with any
Governmental Authority with respect to any Loan for the purpose of ensuring that improvements
constructed or to be constructed are completed in accordance with any governmental regulations
or building requirements applicable to the proposed or completed improvement to the extent that
any such performance or completion bond or letter of credit or other assurance constitutes a
promise or obligation of the Initial Member or any Failed Bank to make any payment or
otherwise provide any performance or satisfaction.
Multibank Structured Transaction 2009-1 RES-ADC
Loan Contribution and Sale Agreement

Article VI Repurchase by the Initial Member at the Company’s Option

Section 6.1 Repurchases at Company’s Option.
The Company may, at its option, and upon satisfaction of the procedures and other requirements set forth below, require the Initial Member to repurchase a Loan, if, and only if, (x) prior to the Closing Date, one of the events
described in Section 6.1(a) through (h) has occurred or (y) after the Closing Date, there is issued
by a court of competent jurisdiction with respect to such Loan a final, non-appealable order or
judgment or there is entered into, with the consent of the Initial Member, a final settlement of
any claim, action or litigation (the “Order”) that requires the assignment and transfer of such
Loan back to the Initial Member (unless the Initial Member has agreed in writing that no appeal
need be taken).


(a) The Borrower had been discharged in a no asset bankruptcy proceeding,
there is no Underlying Collateral securing such Loan and out of which such Loan may be
satisfied, and all guarantors or sureties of the Note, if any, or the obligations contained therein,
have similarly been discharged in no asset bankruptcies.

(b) A court of competent jurisdiction had entered a final, non-appealable
judgment or order (unless the Initial Member has agreed in writing that no appeal need be taken
other than a bankruptcy decree or judicial foreclosure order) holding that neither the Borrower
nor any Obligors, sureties or other obligors owe an enforceable obligation to pay the holder of
the Note or its assignees.

(c) The Initial Member or the applicable Failed Bank had executed and
delivered to the Borrower a release of liability from all obligations under the Note.

(d) A title defect exists in connection with the property that is the subject of a
Contract for Deed, which title defect requires a prior order or judgment of a court to enable the
Company to convey title to such property in accordance with the terms and conditions set forth
in the Contract for Deed.

(e) The Initial Member is not the owner of the Loan (or, in the case of a
Participated Loan, the Initial Member is not the owner of the pro rata interest in such
Participated Loan set forth on the attached Schedule of Loans) and such is not curable by the
Initial Member so as to permit ownership of the Loan to be transferred to the Company.

(f) There exists Environmental Hazards, in which case the Company’s
recourse with respect to this Section 6.1(f) shall be conditioned upon: (i) the presence of
Environmental Hazards not being disclosed in the Loan, Loan File or other material provided by
the FDIC to the Private Owner prior to submission of the Bid; (ii) such Loan having an Adjusted
Cut-Off Date Unpaid Principal Balance greater than $250,000.00; and (iii) the Company
delivering, along with the notice required by Section 6.2, the following, each of which must be
satisfactory in form and substance to the Initial Member in its discretion:

(i) A Phase I environmental assessment, from a qualified and
reputable firm, of the Mortgaged Property securing the Loan; and

(ii) A Phase II environmental assessment or lead-based paint survey of
such Underlying Collateral from a qualified and reputable firm, which assessment shall confirm

(A) the existence of Environmental Hazards on such Underlying Collateral and (B) that the
regulator is likely to require such remediation; and,

(iii) written certification of the Company under penalty of perjury that
no action has been taken by or on behalf of the Company (A) to initiate foreclosure proceedings
or (B) to accept a deed-in-lieu-of-foreclosure in connection with such Loan.

(g) The Initial Member or the applicable Failed Bank, or their respective
officers, directors or employees, fraudulently caused the Borrower to receive less than all of the
proceeds and benefits of a Note. The Company’s recourse with respect to this Section 6.1(g)
shall be conditioned upon the Company delivering, along with the notice required by Section 6.2,
Company for the Initial Member and the Initial Member for the Company, and with respect to
the Affidavit and Assignment of Claim, the form of which is attached to this Agreement as
Attachment C, substituting the duties of the Assignor (as defined therein) for the Assignee (as
defined therein) and the Assignee for the Assignor; and (e) deliver to the Initial Member (or its
designee) a certification, notarized and executed under penalty of perjury by a duly authorized
representative of the Company, certifying that as of the date of purchase by the Initial Member
none of the conditions relieving the Initial Member of its obligation to purchase the Loan as
specified in Section 6.4 has occurred. The documents evidencing the conveyance of the Loan to
the Initial Member shall be substantially the same as those executed pursuant to Article III of this
Agreement to convey the Loan to the Company. In all cases in which the Company recorded or
filed among public records any document or instrument evidencing a transfer of the Loan to the
Company, the Company shall cause to be recorded or filed among such records a similar
document or instrument evidencing the conveyance of the Loan to the Initial Member. Upon
compliance by the Company with the provisions hereof, the Initial Member shall pay to the
Company the Repurchase Price, and such Repurchase Price shall constitute Loan Proceeds for
purposes of the Custodial and Paying Agency Agreement.

Section 6.4 Waiver of Company’s Repurchase Option. The Initial Member will be
relieved of its obligation to purchase any Loan for any reason set forth in Section 6.1 if the
Company: (a) except in the case of the permanent refinance of a Loan in connection with the
final Authorized Funding Draw with respect to such Loan, modifies any of the terms of the Loan
(including the terms of any Underlying Collateral Document or Contract for Deed); (b) exercises
forbearance with respect to any scheduled payment on the Loan; (c) accepts or executes new or
modified lease documents assigned by the Initial Member to the Company; (d) sells, assigns or
transfers the Loan or any interest therein; (e) fails to comply with the LLC Operating Agreement
in the maintenance, collection, servicing and preservation of the Loan, including delinquency
prevention, collection procedures and protection of collateral as warranted; (f) initiates any
litigation in connection with the Loan or the Mortgaged Property securing the Loan other than
litigation to force payment or to realize on the Underlying Collateral securing the Loan; (g)
completes any action with respect to foreclosure on, or accepts a deed-in-lieu of foreclosure for
any Underlying Collateral securing the Loan; (h) causes, by action or inaction, the priority of
title to the Loan, Mortgaged Property and other security for the Loan to be less than that
conveyed by the Initial Member; (i) causes, by action or inaction, the security for the Loan to be
different than that conveyed by the Initial Member, except as might be required by the terms of
the Underlying Collateral Documents; j) causes, by action or inaction, a claim of third parties to
arise against the Company that, as a result of purchase under this Agreement, might be asserted
against the Initial Member; (k) causes to arise, by action or inaction, a Lien of any nature to
encumber the Loan; (I) is the Borrower or any Affiliate thereof under such Loan; or (m) makes
any disbursement of principal or otherwise incrementally funds any Loan.




Excerpts from UCC Article 3 (Holder in Due Course) and UCC Article 9 (Secured Transactions)
(a) This Article applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8.(b) If there is conflict between this Article and Article 4 or 9, Articles 4 and 9 govern.(c) Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency




• (a) An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.(b) Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.(c) Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified endorsement of the transferor, but negotiationof the instrument does not occur until the endorsement is made.(d) If a transferor purports to transfer less than the entire instrument, negotiation of the instrument does not occur. The transferee obtains no rights under this Article and has only the rights of a partial assignee.




Revised Article 9 of the Uniform Commercial Code: An Introduction
By Lech Kalembka    Revised Article 9 (“Revised Article 9″) of the Uniform Commercial Code (the “UCC”) has been approved by the National Conference of Commissioners on Uniform State Laws. In order to avoid the legal nightmare that resulted from the piecemeal enactment of the recent revisions to Article 8 of the UCC (“Revised Article 8″), Revised Article 9 has a uniform effective date in all 50 states and the District of Columbia of July 1, 2001. Although the effective date of Revised Article 9 may seem too remote to warrant present consideration, deferring the task would be a mistake. As discussed further below, there are steps that secured creditors should consider taking now to prepare for the enactment of Revised Article 9. This article is the first in a series that will discuss different aspects of Revised Article 9, and that we hope will ease the transition into the new law.                                        Overview  Although Revised Article 9 will not fundamentally alter the law of secured transactions, it will introduce numerous significant changes designed to clarify and modernize the current version of Article 9 (“Current Article 9″). First, Revised Article 9 will have a substantially expanded scope. Among other things, “deposit accounts,” “credit card receivables,” “payment intangibles,” “electronic chattel paper” and “supporting obligations”( i.e., obligations, such as guaranties and letters of credit, that support the payment of an obligation in which a security interest has been granted) will be covered. In addition, Revised Article 9 will codify the “mortgage-follows-the-note” doctrine, by providing that perfection of a security interest in a payment obligation automatically perfects a security interest in property that secures the performance of such obligation. This significantly broader scope is designed primarily to simplify legal issues arising under securitizations, although its ramifications will also be felt in secured lending and other areas.
(a) [Application of proceeds, surplus, and deficiency if obligation secured.]
If a security interest or agricultural lien secures payment or performance of an obligation, the following rules apply:
(b) [No surplus or deficiency in sales of certain rights to payment.]
If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency.
(a) [Application of proceeds.]
(e) [No surplus or deficiency in sales of certain rights to payment.]
If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes:
(1) the debtor is not entitled to any surplus; and
(2) (2) the obligor is not liable for any deficiency.










Excerpts from 12 USC 1821(e) FIRREA

FDIC Law, Regulations, Related Acts

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1000 – Federal Deposit Insurance Act

(1)  AUTHORITY TO REPUDIATE CONTRACTS.–In addition to any other rights a conservator or receiver may have, the conservator or receiver for any insured depository institution may disaffirm or repudiate any contract or lease–
(A)  to which such institution is a party;
(B)  the performance of which the conservator or receiver, in the conservator’s or receiver’s discretion, determines to be burdensome; and
(C)  the disaffirmance or repudiation of which the conservator or receiver determines, in the conservator’s or receiver’s discretion, will promote the orderly administration of the institution’s affairs.
(2)  TIMING OF REPUDIATION.–The conservator or receiver appointed for any insured depository institution in accordance with subsection (c) shall determine whether or not to exercise the rights of repudiation under this subsection within a reasonable period following such appointment.
(A)  IN GENERAL.–Except as otherwise provided in subparagraph (C) and paragraphs (4), (5), and (6), the liability of the conservator or receiver for the disaffirmance or repudiation of any contract pursuant to paragraph (1) shall be–
(i)  limited to actual direct compensatory damages; and
(ii)  determined as of–
(I)  the date of the appointment of the conservator or receiver; or
(II)  in the case of any contract or agreement referred to in paragraph (8), the date of the disaffirmance or repudiation of such contract or agreement.
(B)  NO LIABILITY FOR OTHER DAMAGES.–For purposes of subparagraph (A), the term “actual direct compensatory damages” does not include–
(i)  punitive or exemplary damages;
(ii)  damages for lost profits or opportunity; or
(iii)  damages for pain and suffering.
In US District Court Eastern District of Pennsylvania, FDIC as Statuatory Successor to Resolution Trust versus Parkway Executive Center, this Fedral Court Case decided 2 very important issues.  This case stems from an action commenced in 1988.  The Federal Court decided:

1. That a Borrower has a “right to funding vested”, if the bank was funding the loan by its terms prior to failure and that funding was interupted or ceased by repudiation of the contract by the FDIC, as Receiver for the failed bank.

2. That Actual, Direct and Compensatory Damages can be defined as the dimunition of value as determined by the value of the project or property with financing as compared to the value of the property without financing.  Basically it is comparing the FMV of the project or property before the bank failed (when the bank was funding the loan) to the FMV of the property after it lost funding due to the bank’s failure and subsequent repudiation of the loan funding by the  Receiver, which resulted in the project losing value because it was left incomplete.














Least Cost Resolution Mandate Explanation / Discussion

The FDIC is charged by Congress within the federal statutes known as the FDI Act and 12 USC1821(e) known as FIRREA to pursue the “Least Cost Resolution” of the failed bank receivership’s assets. Failure to pursue the least Cost Resolution to the receiverships assets violates the statutes that empower the FDIC in their mission and therefore, invalidates the authority granted under the acts mentioned above. The FDIC is clearly not pursuing the least Cost Resolution as required by Congress by virtue of their use of PPIP’s, Loss Share Banks or Tax Payer Money.

Here is an easy example and it has played out approximately 360 times in the current recession nationwide. The numbers vary but the mechanics are the same and the national impact is huge:

American Southern Bank (Kennesaw, GA) sought $14MM to heal its capital account and meet the adequately capitalized definition required by current regulation. The bank was unable to raise the required capital via the marketplace in time. The FDIC closed the bank resulting in a loss to the DIF of approximately $49MM as estimated by the FDIC.

The Least Cost Resolution would have been to use $14MM of the DIF to re-capitalize the bank via a receivership. The bank would not be closed. Rather it would stay open under its own name and the receivership would be run I operated by the bank’s existing management paid by the bank. The bank would be required to pay the DIF a preferred rate of return on the investment of DIF funds until repaid. The bank would also be required to hire an Executive Manager for the Receivership, who would be responsible only to the FDIC as regulator, whose function would be to monitor implementation of the regulator’s required changes for industry standard safety and soundness practices and to report monthly to the regulator on the bank’s progress. The bank would be responsible for the cost of the Executive Manager’s compensation. All incentive compensation to the former bank’s management and dividends to shareholders would cease until the investment was repaid at a preferred return to the DIF. Board members would stay involved in the bank and be compensated at rates approved by the regulator for the receivership. Once the investment was retired, control of the bank would be returned to the shareholders and board.

In this way, the DIF realizes a $14MM asset with a preferred return to the DIF rather than absorbing a $49MM Loss. All depositors, borrowers and vendors of the failed bank are treated equally and are protected and those relationships Icontinue in the ordinary course of business and their related contract agreements. Loans are renewed at maturity. Performing borrowers and vendors of the failed bank are not punished by virtue of this structure. Borrowers and vendors relationships are not disrupted by closure and severance. The effect of the receivership is transparent to the public – NOTDESTRUCTIVE.  Under this method you have a “Saved” bank not a “Failed” bank. You have an entity with a vested interest in the health of the loans and borrowers as well as depositors, as opposed to current methods where investors have a vested interest in destroying borrowers, their balance sheets and taking collateral at great discounts to value, thereby destroying the market place.

Current FDIC methods protect depositors at the expense of all borrowers and vendors of the failed bank, creating different classes of citizens and unequal treatment / consideration.
Current FDIC procedures have rendered the DIF insolvent and unable to function. Current FDIC procedures not only hurt borrowers and vendors (usually small businesses) but their collection efforts seek to prevent them from recovering without regards to the specifics of their cases I relationship with the bank. They are air classified into a Loser Class unnecessarily.

Their partners in ,PPIP’s specifically and Loss Share Banks in general are not rewarded to resolve or workout loans. They, in turn, prefer to foreclose and or litigate to collect their government guaranteed return and protection. This, in turn, decimates the local economy because it destroys asset values of collateral. promotes unemployment and literally seeks to punish the borrowers I guarantors (the vast majority of which were performing prior to the bank’s failure) and prevent them from returning to run their businesses or new entrepreneurial enterprises, which are needed to provide job growth for recovery purposes.

Georgia has been the epicenter of bank failures in this current debacle and the Georgia economy will not recover anytime soon. in large part due to the deleterious impact of the FDIC and their out-dated, antiquated and legally questionable, disruptive methods and procedures. However given the number of bank failures in the past 3 years, the
problem is national in scope and will severely hamper the nation’s
recovery unless Congress acts to correct the situation.
—————– — —– —- ————–













Proposed Preferred Least Cost Resolution Amendment to FIRREA


Without diminishing the role, historical purpose or authority of the FDIC as defined within the FDI Act and or FIRREA, we propose the following supplemental provision to the body of law known as The FDI Act and 12 USC 1821(e) and its various counterparts in their entirety known as FIRREA referred to herein as “THE ACTS”:

“Notwithstanding anything contained within THE ACTS to the contrary, in which case this provision shall control and govern:  The Preferred Least Cost Resolution for the resolution of the Receivership’s assets shall be the contribution of capital by the FDIC, from the deposit insurance fund, in an amount sufficient to adequately capitalize the Receivership’s Capital Account as defined by prevailing regulatory standards for banks, in return for a preferred return not to exceed 10% per annum.  During the term of the investment:

The Receiver shall retain the former bank’s name, management and employees to operate the
Receivership and manage the Receiver’s assets and liabilities in the ordinary course and to
honor all agreements, contracts and responsibilities including but not limited to all depository
accounts and loan relationships of the former institution, thereby protecting all depositors,
borrowers and vendors of the Receivership.  The Receivership will also continue to make
advances against valid loan contracts and renew loans for qualified borrowers in the ordinary

The Receiver shall not allow incentive compensation or excessive salary compensation to be paid to or accrued for the future payment to the former bank’s management, now Receivership managers. Shareholder dividends will cease.  Committee Member / Director compensation will be limited.

The Receiver will employ a new Executive Manager to supervise the activities of the Receivership’s managers and implementation of the regulator’s safety and soundness recommendations by the Receiver’s managers on the operation.  The Executive Manager shall report solely to the FDIC as regulator in all matters and insure the implementation of the FDIC’s policies and regulations.
Upon payment of the preferred return and return of all contributions of capital to the deposit insurance fund managed by the FDIC, the Receiver and related State Banking Department will return sole control of the capital stock to the shareholders and reinstate the charter of the former bank to the shareholders and then managers of the former Receivership.

In the event the FDIC, in its sole discretion, pursues an alternate method as the Least Cost Resolution in lieu of the Preferred Least Cost Resolution for the assets of the Receivership, then the collection efforts of the Receiver, and any assignees of or successors-in-interest to the Receiver, by statute, will be limited to the disposition of collateral securing the Receivership’s, assignee’s and or successors-in-interest’s note(s) in full satisfaction of Borrower’s and Guarantor’s obligations for the debt outstanding without exception.  No deficiency will be allowed or sought by the Receiver or it’s assignees or successors-in- interest as a condition of note acquisition.  If the Borrower desires to retain the collateral and maintain the loan payments on a current basis, then the Receiver will renew the note at a fixed market rate of interest limited to a maximum of 6% per annum including fees, for a term to maturity of not less than 60 months, on the same terms, conditions and amortization that were contained in the original contract as of the day of the Receiver’s appointment, in which case a default by borrower will reinstate the Receiver’s contractual right to pursue deficiencies and any other remedy allowed by law and enumerated in the original loan contract, in the event of borrower default.



Letter Testimony to Congress August 2011. (Monteagle Development, Inc.)

Correction / Observation:   The letter below refers to $92MM paid by Rialto for their equity stake in Multibank and the balance being paid by the loan from Treasury.  Early public reports reflected this sum.  The PPIP documents refer to a larger sum being due from Rialto in return for their 40% interest.

So for clarity and truth, let’s do the math.  The numbers are approximate.

The Purchase Price and estimated value of the assets as determined by the FDIC (per their testimony) was $1.2 Billion.  The FDIC contributed approximately $330 Million as an equity contribution.  Multibank borrowed $627 Million from Treasury and Rialto is responsible for the balance due of approximately 243 Million.  Here is the math.

$1,200,000,000  Purchase Price of Assets
$   330,000,000  Less Equity Contribution FDIC
$   243,000,000  Less Approximate Cash Invested Per Rialto for 40% Interest (not $92MM downpmt)
$   627,000,000  Borrowed From Tax Payers

During the May 16, 2012 hearing by the Oversight Committee, both the FDIC and Rialto claim that none of the loan proceeds funded the purchase of Rialto’s equity stake.

$1,200,000,000  Asset Value
X               40%  Rialto’s Interest
$   480,000,000   Asset Value Acquired by Rialto

$    480,000,000  Asset Value Acquired by Rialto
$    243,000,000  Less Approximate Cash Invested Per Rialto
$    237,000,000  Approximate Asset Value Acquired by Rialto Funded by Tax Payers

It is very clear that the $627 Million loan from Treasury did indeed finance approximately one-half of Rialto’s interest in Multibank, the note purchaser, contrary to testimony, with Tax Payer money.








Development, LLC

February 23, 2012
House Financial Services Committee
Honorable Lynn Westmoreland
Honorable Jaime Herrera-Beutler
House of Representatives
United States Congress
Washington, D.C. 20066
Dear Congressman Westmoreland and
Congresswoman Herrera-Beutler:

RE:FDIC, Multibank and Rialto Treatment of Borrowers

My loan involved an active subdivision with lot sales contracts in Cherokee County GA. Alpha Bank& Trust, the Lender, failed on 10/24/2008 and the FDIC was installed as Receiver by the GA Department of Banking and Finance. My loan was default free and was even funded by Alpha Bank the day they failed, which demonstrates the Receiver obtained the note free of Borrower default. My first meeting was on or about November 3, 2008 and I was very proactive in pursuing the Receiver’s representatives in hopes of saving the loan and subdivision. I was cooperative. I provided detailed information.

I was told up-front that the Receiver would not fund my loan for the bank approved interest expense reserve or on-going development activity. I made multiple attempts requesting funding for both, which were ignored I refused. I made every effort to move the loan to another bank, but could not. I brought a real estate opportunity fund, which had agreed to fund a new loan to allow me to finish the development, if the Receiver would allow them to be in first lien position. The Receiver would be repaid 100%by lot sales over time.

The Receiver’s answer was no. Then their representatives suggested a different structure, if I could find a bank lender that would provide a non-specific amount of money to reduce the note ($2MM-$2.5MM best guess), the rest (approximately $3.1MM-$3.6MM) would go into a deficiency note. The deficiency note would be sold to an investor for pennies on the dollar and provided I paid the required quarterly payment (suggested as $10M per quarter for 2 years), the principal would be forgiven at maturity by the terms of the agreement. They then stated no 1099 would be produced for debt forgiveness on the deficiency note. At that point I realized the representatives of the Receiver were suggesting tax fraud and excused myself from the meeting.

I then wrote Senator Johnny Isakson for help in communicating directly with the Receiver. He was very helpful and indeed got my letters thru to the Receiver. I thought if the Receiver knew what their contractors were doing, they would appreciate the heads-up and I might have better luck working directly with the decision-makers. To my surprise and dismay, I was wrong. They seemed angry that I brought this to their attention.

They did not admonish the acts of their contractors and seemed more interested in stone-walling any resolution or trying to find fault with the Borrower. In February 2009 the FDIC sent a letter stating my draw privileges were suspended and would remain that way beyond the maturity of the note. A few days later, they claimed in a second letter that the loan was in default for non-payment of interest. Remember, I had an approved availability in the note for interest reserve expense with a significant (approx $350M) unused commitment remaining, that the Receiver consistently refused to fund. in addition to refusing to fund ongoing development as provided by the terms of the loan agreement.  I responded with a letter claiming repudiation of my note (breach by the Receiver), which they did not deny and they even acknowledged my concerns in writing. The FDIC committed other acts to breach the note, by the terms of the note and deed” as have their successors in interest, Multibank and Rialto.

Without funding, I could not order work to continue on the project. The loss of funding cost me the lot sales contracts (26 contracts at the time) and the loss of both businesses serving as Borrowers on the note.

On February 9, 2010. the Receiver sold the note to 2009 Multibank RES-ADC Venture, LLC. This is a PPIP funded by TARP funds (Tax Payer $’s from U.S. Treasury). It is 1 of 2 PPIP that Rialto Capital Asset Management (a wholly owned subsidiary of publicly-traded Lennar homebuilders of Miami) bought into as the winning bidder. There are 31 such PPIP today between the FDIC and opportunistic hedge funds and publicly-traded investors.

In May 2010, Rialto first contacted me wanting me to sign a PNL(Pre-Negotiation Letter), which I refused to sign because everything was binding on the Borrower I Guarantor and required Borrower I Guarantor to grant Rialto, Multibank, the FDIC and all other note-holders before and after a blanket Hold Harmless Release of Liability as a condition of talking. They refused to talk about your situation or loan without signing the document. After offering to talk without signing the letter and declining politely several times to sign the PNL over 60 days or so due to its one-sided terms and their refusal to grant me the same Release and Hold Harmless courtesy, they called me in for a meeting in August. The purpose of the meeting was to attempt to convince me to sign the PNL.

Again I declined. Matt Shulman, a Partner I Director in Rialto, then stated he would just sue and “he would not lose any sleep over it.” I marked up the PNL, deleting the blanket hold harmless provision and making several other changes that would be necessary for me to be able to sign the document. They later refused to accept the marked-up version and followed up with a demand letter in the fall of 2010. In November 2010, they filed a lawsuit in the name of a newly created Florida LLC. a single asset entity that is serving as note-holder I Plaintiff.

I am now in a frivolous lawsuit suit with the Rialto controlled Plaintiff. This is a “malicious use of process” and they are using it liberally against the 5,500 Borrowers of the PPIP’sin which they bought a minority interest. Given it is on-going litigation; I am limited in providing any
more detail.

The FDIC and Multibank I Rialto are not interested in resolving debt. They use the federal court system and threat of the IRS to extort money and property out of Borrowers and more to the point, individuals that were secondary obligors on the loan. They make every effort to confuse the court and obfuscate the issue via the legal system.

The FDIC requires a scorched- earth collection effort as a condition of participating in the PPIP. It doesn’t matter what the FDI Act or FIRREAsay. It does not matter what federal case law says. It does not matter that the Receiver breached a default free bi-Iateral contract (loan agreement), therefore. giving the Borrower a legitimate claim for damages against the Receiver under both federal statutes (FDI Act & FIRREA).By using this structure (PPIPand Loss Share Banks for that matter), the FDIC and their partners are attempting to do indirectly what the FDIC could not do directly using their superpowers.

FDIC mid and senior level managers do not want to be held accountable for making decisions. The regulators know that if they approve a “resolution” for anything less than full pay-off, even if it is the logical and obvious least cost resolution available, they will eventually be held accountable for the decision. This produces a set of pronounced behaviors in the way the Receiver and their representatives deal with Borrower of failed banks.

1. They prefer to hide in the background and avoid operating in the light. They will use others to do their dirty work so they have plausible deniability (contract collectors like Quantum Financial Services and similar). These people never have authority and never give detailed information or answers as to why a request or resolution was declined.

2. They reward those who will come forward and serve as their shield from the public, like Rialto.

3. They will absolutely lose money on a resolution before they are held accountable for a decision. Simple example. let’s say you have a $1.2MM loan and the most you can muster to “resolve the debt is $800M or $lMM. They have often times declined the offer from the Borrower in favor of putting it out on Debt Ex or similar auction and accept $120M – $150M for the asset. In reality, they are just selling the loan’s collateral to an investor on the cheap
rather than working with the Borrower fighting for his life and his company. That is not the
least cost resolution and violates their statutory requirements of the FDI Act and FIRREA.

If you study the Purchase and Sale Agreement that created Multibank, you will notice several things:

1. The terms of the document were written by the FDIC and the documents that created Multibank were created by the FDIC.

2. The FDIC was the seller of the notes.

3. 22 FDIC Receiverships were installed as the Initial Member of Multibank.

4. The FDIC expressly states that Multibank has no use of the FDIC name or statutory superpowers, even though there are 22 Receiverships invested as the Initial Member.

5. Then Multibank borrows TARP money from the U.S Treasury at 0% interest. The Receiverships’ loans are pledged as collateral only.

6. Then Multibank (FDIC)sells a 40%interest to Rialto. It is a bulk sale advertised as “Sub and Non-Performing Loans.” Rialto is the winning bidder. There are 2 PPIPwith Rialto totaling $3.02 Billion Dollars face value loans. Multibank borrowed a total of $626,906,441 from Treasury in TARP funds (Tax Payer $’s) and reserved the right to borrow more.  So Multibank Paid I Borrowed approximately 20.7 cents on the dollar for the assets. Rialto then paid an additional $92MM or approximately 6.7 cents to participate. Multibank paid for a portion of the notes with the borrowed funds, which were deposited into a defeasance account and the seller I FDIC recouped $92MM paid by Rialto to participate. They could have sold the notes for the same $92MM without jeopardizing Tax Payer $’s or all of the unnecessary expense that follows with litigation and delayed resolution.

7. The defeasance account provides money to protect the collateral, sue borrowers of the failed banks. funds damages when they lose and pays Rialto a .5%fee for “managing” the assets annually.

8. The FDIC, as Seller of the notes, indemnifies Multibank from any loss resulting from deficiency on the liquidation of collateral, so the Federal Agency, which is broke, is guaranteeing the note Purchaser including Rialto, so that they have zero risk in the transaction.

Now here are the real kickers.

1. By written agreement, the Private Partner has to agree to pursue the failed bank borrowers, without regards to the law or specifics of their individual cases or situations, until they cannot be legally pursued anymore. They are to be pursued until they pay the note in full, file bankruptcy, Multibank obtains judgment and pursues collection of the judgment or until the borrower gets a judgment in its favor that cannot be appealed.
2. The TARP ACT required that any borrower (Multibank in this case) utilizing TARP funds provide the U.S.Treasury an equity stake in the borrower. The FDIC, as author of the documents and Multibank (borrower, FDIC member) / Rialto (participant & member) all failed to provide US Treasury any equity interest in Multibank as required by this Executive Order law. as evidenced by their documents.

So by way of observation, you have a Federal Agency relinquishing its superpowers to participate in the acquisition of the very toxic assets, it said it had to sell off. You have a Federal Agency picking winners and losers. You have a Federal Agency, not as Receiver but as a member in a “For Profit” enterprise, using the virtually unlimited resources of the Federal Government, to crush individuals without regard for the law, for the profit of the Agency and a wholly owned subsidiary of a publicly traded company. You have a Federal Agency and publicly-traded company using tax payer dollars at no return to the American tax payer.

The FDIC is authorized to use the industry funded DIF for their resolution activities not Tax Payer Dollars. The use of Tax Payer dollars was never authorized by Congress. The American tax payer bears 100% of the risk because the FDIC is insolvent and only has the American tax payer to bail them out if they lose in this venture and the tax payer only gets a return of principal borrowed if they win. This violates the terms I requirements of the Executive Order called TARP. You have a Federal Agency and a publicly-traded company colluding to use tax payer dollars without meeting the requirement of the law and therefore, they are participating in an illegal act.

Federal law, state law and the Uniform Commercial Code all acknowledge that you are not allowed to benefit from participation in an illegal act under the law. Article 5 of the Bill of Rights to the Constitution is intended to prevent an unlawful taking by the Federal Government and its proxies and requires restitution under “the just compensation clause.” You have a Federal Agency requiring their “Private” partner to aggressively pursue a scorched-earth collection policy and in the process they are destroying people, jobs, the communities in which they live and an entire layer of entrepreneurs, on which the country  depends for jobs creation. They intend to make sure you are punished and ruined unless you give them everything they want without regard for the law. At least the MOB will shoot you. The Federal Agency and Rialto want to ruin you for life. No recovery.

Before you feel sorry for the Receiver and their function. remember they sold the asset which completes their mission. They did not have to opt to stay in and artificially create a situation that is detrimental to everyone in the communities impacted, borrowers and non-borrowers alike. They did not have to borrow and guarantee $626,906,441 to sell Rialto the notes for $92MM. They did not need to require a policy of death to borrowers in exchange for the sale and they may have realized more from Rialto on a straight sale no strings attached. They could have put it all on Debt Ex and gotten 6-7 cents on the dollar.

There are approximately 5,500 notes in these 2 PPIP, of which 40% (approximately 2,100 notes) are within the state of GA. In total, the notes span 11 states. Left unchecked, it is certain that the Federal Agency and their PPIP partners, especially Rialto, will undermine any recovery in the local economies they attack for years to come. Remember there are 31 PPIP and I have only touched on 2 of them.

Consider this, Integrity Bank and Alpha Bank failed 31/2 years ago and these assets are still unresolved. The effect on the local markets will linger years because the Federal Agency’s policies and procedures make things worse instead of better. There is another way to do their job and eliminate the pain to the market and borrowers. There is a proposal being presented in a separate letter including a Proposed Amendment to the FDI ACT and FIRREA.

In addition to the PPIP, you have the Loss Share Banks and they present their own set of problems for the local economies. It has been estimated by the banking industry that the Loss Share banks will dump $3.5 Billion in real estate on the north GA market alone in the last 6 months of 2014, in order to avoid losing the FDIC Loss Share prior to expiration. That does not include the activity of Multibank and the PPIP program. Really, what chance do we have at economic recovery. This is the true nature of the FDIC and their process toward resolution. It does more harm than good and with the notes sold, it is unnecessary.

Finally. consider this. We are required to pay tax to fund the Federal government. No choices there. Now we have a Federal Agency borrowing and risking Tax Payer money (our money not theirs) with no return to the tax payer and giving this free money to a publicly-traded company to attack and destroy the citizens that were taxed to provide it and they broke thellaw to do it. That is not America. That is not the intention of the FDI ACT or FIRREA. It is not moral or ethical. Why is Congress not monitoring the FDIC and their activities and holding them accountable? Their actions don’t just impact borrowers of failed banks. They are destroying everyone. jobs. communities and the economy within the area of each failed bank. It is not only a local market problem. It is a national problem.

Please help. They are out of control and have stepped way beyond their function and the law.


Monteagle Development, Inc.
Chris Pridgen, President

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