What Is an Asset Liquidation Agreement (ALA)?

An asset liquidation agreement (ALA) is a contract between the Federal Deposit Insurance Corporation (FDIC) and private sector contractors hired to manage the assets of failed financial institutions. ALAs outline the types of fees that contractors can receive compensation for and the value of distressed assets that the contractor is responsible for handling.

Key Takeaways

  • An asset liquidation agreement (ALA) spells out the terms and obligations for third-party banks who acquire the assets of a bank in liquidation.
  • The ALA terms are defined by the FDIC, who seeks out third-party banks to acquire the assets of failed banks so that the resolution of the bank failure is both quick and orderly.
  • ALAs were first introduced in the 1980s during the savings and loan crisis.

Understanding Asset Liquidation Agreement (ALA)

Asset liquidation contracts first appeared during the U.S. banking crisis of the 1980s and early 1990s. In order to safeguard the goodwill of depositors, other financial institutions, and the overall economy, the FDIC wanted to resolve failed banks and financial institutions as quickly as possible. At the same time, the FDIC wanted to be able to protect the deposit insurance fund and to do so meant that it had to sell the assets of failed banks for the highest price it could obtain.

ALAs, which are also often referred to as Partnership Dissolution Agreements, were designed to maximize the present value of net cash flows that the FDIC would recover through the sale of distressed assets. ALAs are typically utilized by business owners seeking to dissolve a business partnership or business owners whose partners wish to exit the businesses. Partners looking to go their separate ways must agree to file a statement of dissolution to the Department of Treasury as well as with every county clerk's office that business has been routinely conducted in. Furthermore, both partners must agree to publish at least two news articles that announce their liquidation of the business.

Offer of Asset Liquidation

ALAs were initially only offered to asset management affiliates of banks looking to acquire the assets of the liquidating bank, but ultimately, any private sector asset management company could take part. The agreement allowed contractors to be paid for their overhead expenses and expenses related to the handling of the assets themselves. These expenses included taxes, reports, foreclosure, as well as legal and consulting fees. If the contractor was unable to classify an asset, it was allowed to send said asset back to the FDIC, though the contractor could be penalized for taking too much time to make this move.

One of the major components of the fee structure of ALAs was the incentive fee. The fee was scaled, with the contractor receiving a higher fee for achieving a high level of net collections. This helped generate additional funds towards the end of the contract since the contractor was more likely to have resolved the easiest assets and was facing more complex transactions.