Asset Liquidation Agreement (ALA)

A contract between the Federal Deposit Insurance Corporation and private sector contractors hired to manage the assets of failed financial institutions. Asset liquidation agreements (ALA) outlined the types of fees that contractors can receive compensation for, and the value of distressed assets that the contractor was responsible for.

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 Federal Deposit Insurance Corporation (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.

Asset liquidation agreements, 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. Asset liquidation agreements 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.

Asset liquidation agreements 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, legal and consulting fees. If the contractor was unable to classify an asset it was allowed to send the 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.