June 4 (Bloomberg) -- The Federal Deposit Insurance Corp., unable to get U.S. banks to sell toxic loans in a government program, plans to sell hard-to-price assets seized from failed lenders using guaranteed debt financing.

A test auction of illiquid bank assets, planned this month, was delayed yesterday after lenders raised capital without needing to sell bad loans, the agency said. The FDIC will instead use debt guarantees as an incentive for buyers of assets when lenders are in receivership, the agency said.

“If the FDIC can sell bad assets of failed banks, they will be a winner and it gives opportunities for the private sector as well,” said Ralph “Chip” MacDonald, a partner specializing in financial services at law firm Jones Day in Atlanta.

The Obama administration unveiled the two-part Public- Private Investment Program on March 23 as a centerpiece of its effort to shore up the financial system by removing illiquid assets. It would be funded by $75 billion to $100 billion from the Treasury’s Troubled Asset Relief Program.

Since the program was announced, U.S. banks have raised capital through stock sales and by converting preferred shares, and as of yesterday the total reached almost $100 billion, according to data compiled by Bloomberg.

“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” FDIC Chairman Sheila Bair said yesterday in a statement in Washington.

Assess Details

Bair said pushing back the pilot sale will give regulators time to assess details of the troubled asset programs. Selling assets from failed banks will be modeled on a process used by the Resolution Trust Corp. to shut failed savings and loans in the 1980s and 1990s. Bids will be solicited in July, the FDIC said. The funding mechanism is specific to financed asset sales provided through receivership, said FDIC spokesman Andrew Gray.

The PPIP changed when President Barack Obama signed legislation that imposed conflict-of-interest restrictions on buyers and sellers. Bair signaled last week that banks would hesitate to sign up because of the law.

“The pricing mechanisms might not have been worked out and the maximum FDIC leverage ratios may not have been practically available,” MacDonald said. “It had potential. There were never enough details to know what the LLC was going to look like for investors to earn a return.”

The Legacy Securities program, run by the Treasury and the Fed, is the second leg of the PPIP and would use federal money and funds raised by companies from private investors to buy distressed mortgage-backed securities. They’re considered illiquid because they’re backed by assets such as troubled commercial and residential mortgages.

To contact the reporter on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.

Last Updated: June 4, 2009 00:01 EDT