U.S. bad-asset plan won't limit pay at nonTARP banks

WASHINGTON (Reuters) - U.S. banks that sell assets in the government's public-private investment program but have not received federal TARP money will not be subject to executive compensation restrictions, the chairman of the Federal Deposit Insurance Fund said on Monday.

Sheila Bair also said in a briefing with reporters that banks will likely sell their distressed loan-related assets at fair value and will have to take a discount from the value they are being carried at on the balance sheet.

Bair said these terms may not be suitable for all banks, especially for those institutions under severe stress.

"I do think there may be some banks beyond help," Bair said. "There are others who with the program may be able to cleanse their balance sheets and raise some fresh capital."

Public outrage erupted last week at the fact that American International Group paid $165 million in bonuses after receiving $180 billion in government aid. Legislation is now moving through Congress to further clamp down on executive pay for firms that receive bailouts.

Regarding restrictions, Bair said some banks interested in participating have already received federal funds from the $700 billion Troubled Asset Relief Program (TARP) and are subject to the accompanying restrictions on executive compensation, dividends and stock repurchases.

For banks that have not received TARP funds but are interested in selling troubled assets, "those restrictions will not apply," Bair said.

The U.S. Treasury Department on Monday formally announced its three-part program that will provide financing through the Federal Reserve and the FDIC to aid public-private investment partnerships in buying up to $1 trillion in distressed loans and securities.

Bair said the FDIC estimates that U.S. banks have about $1 trillion of distressed "legacy" loans on their balance sheets. She said the "legacy loan" portion of the program can realistically cleanse the banks of about $500 billion of those assets.

"This is a critical step forward in restoring clarity to the markets," Bair said.

An FDIC official said later during the briefing that six weeks would be a "very aggressive" timeline for launching the auctions to buy up banks' assets. He said the timing will depend on the comments the FDIC receives on the program and the complexity of the assets.

Bair said she expects the program will be "very profitable" for private investors and for taxpayers, and said the FDIC will explore whether the taxpayers should get more than 50 percent of the upside.

"If this thing makes money, and I think it will, the taxpayer should capture a lot of that," she said.

She also noted that the program does not put the FDIC's dwindling deposit insurance fund at risk. Rather, the fund -- which backs deposits at FDIC-insured banks -- will be bolstered through the debt guarantee fees that the FDIC collects through the program.

Also, Bair said the asset purchase plan has a good chance of finding that "magic price" at which banks are willing to sell their distressed assets and the private market is willing to buy them.

"I think this is the best possible structure to get that pricing mechanism started," she said. "It will be a significant benefit to some banks."

(Reporting by Karey Wutkowski and Rachelle Younglai; Editing by Gary Hill)