Date: 1986-10-17
Speaker: JOHN SHAD (republican)
Chamber: S

Chairman. Securities and Exchange Commission. Washington. DC. DEAR MR. SHAD: Both the President and Congress have proposed loan asset sales as part of our effort to meet the GrammRudmanHollings deficit goals. In his fiscal year 19.87 budget request. the President proposed the sale of $15 billion of loans from 13 loan portfolios. And the Conference Report on the Reconciliation Bill proposes loan sales that would yield approximately $5 billion in fiscal year 1987. The federal government .has relatively little experience with loan sales and has certainly never engaged in transactions of the size currently being considered. As we go forward with these sales. it is essential that procedures be established and followed to guarantee that the public interest is served. Specifically. we must insure that: The governments proceeds from the sales are as great as possible. There be no collusion or uncompetitive practices on the part of underwriters. -The rights of current borrowers are protected. There is full and open competition in choosing financial advisers for the loan sales. Audited records and evaluations of the loans to be sold are made publicly available. and Final details of the sale be made part of the public record. Several aspects of loan Sales require greater scrutiny. For example: Many borrowers from the agencies enjoy a variety of consulting and advisory services that have traditionally been a part of the loan package. What would be. the status of these services when the loan are sold? Many existing loans carry special provisions regardig repayment procedures. use or nonuse of collection agencies. forebearance. etc. What would be the status of these provisions when the loans are sold? OMBs guidelines for loan asset sales disallow the sale of assets with recourse. Might not some forms of pooling of assets. combined with certain types of government guarantees result in greater revenue to the government? How should underwriters compensation be structured to maximize the proceeds to the government? Flat fees offer little incentive for extra effort by."the undervriter. whereias. percentage fees (and perhaps graduated fees) could make the public a.nd private interest coincide. Should a fixed bid by an underwriter be allowed in cases whe e.tl bid is negotiated with little or no competition? . . . In cases where the underwriteres bids appear too low. can a thira party be brought in (and rewarded) for seeking out underwriters with higher bids? Should government loan sales be allowed exemptions to SEC registration requirements? What agencies should be involved in oversight to protect government and investor interests? � Do individual agencies have the expertise to market their loansor is a centralized effor required? In the months ahead. I will be leading an effort to insure that loan sales serve the public interest. With the huge sums involved and the potential for abuse. it is imperative that we institute appropriate procedurues and be vigilant in our oversight. It is my expectation that you will investigate the above question that fall in your areas of responsibility and report back your conclusions. I look forward to working with you in this critical area of oversight as preparations for loan sales go forward. Sincerely.