U.S. toxic asset plan seen helping big banks

The plan, known as the Public-Private Investment Program, gives government help to private investors looking to buy loans and securities from banks.

But banks are most likely to sell assets they have already written down substantially. That typically means bank loans acquired from another bank, or securities portfolios, two classes of assets that are abundant at some larger banks, and in short supply at smaller banks.

Take Wells Fargo & Co (WFC.N), for example. The fourth-largest U.S. bank has about $1.3 trillion of assets on its balance sheet, more than half of which came from its acquisition of Wachovia Corp. Wachovia and Wells Fargo aggressively wrote down many of those loans, most notably a $122 billion portfolio of risky home loans known as option adjustable rate mortgages, on which the banks recorded some $30 billion of write-downs.

Those massive write-downs give Wells Fargo room to sell some of the loans into the government's program and potentially turn a decent profit, analysts said.

And if the bank can sell some option ARM assets at a profit, or even at their current book value, it should, said Bill Fitzpatrick, equity research analyst at Optique Capital Management, which manages about $1 billion of assets.

Investors are unsure about how well the loans will perform, and if Wells Fargo's write-downs were too large or too small. Removing some of that uncertainty may help the bank raise capital in the future, Fitzpatrick said.

"If you can get a decent price for them, it's a good idea to dump them. I would be happy if they sold them," he added. Optique owns Wells Fargo shares.

Other banks that may be interested include JPMorgan Chase & Co Inc (JPM.N), which last year acquired many of Washington Mutual's assets, and PNC Financial Services Group Inc, (PNC.N) which bought National City, also have large loan books on which they have recorded big write-downs.

When a bank acquires another depository institution, it often has an incentive to write down the target's assets as aggressively as possible.

Representatives at Wells Fargo and PNC both said their banks were still reviewing the government's plan, and that not all the details from the program have been disclosed. A spokesman for JPMorgan declined to comment.

FOR SMALLER BANKS, LESS HELP

But smaller banks that shied away from investments in securities and never acquired loans from rivals are less likely to sell their assets to the PPIP, analysts said. Their loans are likely recorded on their books at a price well above their market value -- typically at their historical cost minus any reserves set aside for them. If banks sold these loans, they would have to take a big hit to their capital.

"I don't think many banks will be looking to sell loans," said Anton Schutz, president of Mendon Capital in Rochester, New York.

The U.S. government announced details on the PPIP on Monday. The program will provide government financing for private investors to buy loans and securities. The PPIP will likely generate up to $700 billion of funds for buying loans, and up to $400 billion for buying securities, Barclays Capital Strategist Ajay Rajadhyaksha wrote on Tuesday.

(Reporting by Dan Wilchins; editing by Richard Chang)