FleetBoston

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turned heads in the banking sector Wednesday with an innovative

sale of $1 billion in bad loans. Analysts for the most part applauded the move but remain split about whether other banks will soon be chasing similar deals.

FleetBoston, often praised for its healthy credit quality, said it sold the shaky commercial loans to an undisclosed buyer with the help of New York investment firm

Patriarch Partners

. The move was largely viewed as proactive, given Fleet's noteworthy track record on risk management, but others were wondering if struggling banks hoping to shore up their balance sheets could jump on the same bandwagon.

Credit quality is the most pressing issue in the banking sector nowadays. Many borrowers hurt by higher interest rates and a slowing economy are having trouble repaying loans taken two or three years ago when the economy was charging ahead. And many banks that eased lending standards at the time are paying the price now as increasing levels of bad loans hurt their balance sheets.

Normally, banks take the cost of bad loans out of a special fund set aside for that purpose, known as a loan-loss reserve. From time to time, banks also sell off loans piecemeal to other institutions or write down their value and take a charge against earnings. Fleet's move is unusual in that it combined both a writedown and the sale of a substantial portfolio of loans, ridding the balance sheet of a huge amount of troubled assets all at once.

But other banks, envious of Fleet's maneuver, may find it difficult to duplicate. If they haven't been marking down loans all along or keeping a strong reserve, they'd have to bite the bullet and take a charge against earnings for the difference between the bad loans' value on their books and what they would fetch if sold off.

"There are probably a number of banks that are interested and looking at this," says Kathy Shanley, fixed-income analyst with

Gimme Credit

, a debt-rating newsletter. "The question is can they do this without having to take an upfront loss and writedown on the loans?" which would hurt profits, she says.

Fleet, which will take a $75 million writedown in this deal, keeps a strong loan-loss reserve, regarded as one of the best in the industry. In addition, the bank had been steadily writing down the value of those loans from $1.35 billion to about $1 billion, resulting in a more gradual loss spread out over time. With an incoming $725 million in cash and $203 million in securities from Patriarch, the loss winds up being a manageable amount out of the reserve. "If you don't have

loans marked down to market then it's going to be pretty tough to sell them," says Shanley.

As for potential candidates for imitation deals, Shanley suggests

Bank One

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and

Bank of America

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. But she says it would be tough for a leading lender like Bank of America to risk altering client relationships. Banks often loan money to clients as a springboard to further business, including underwriting and advisory roles. Selling off a client's loan would certainly dent such a relationship, she notes.

First Union's

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last quarter indicates it could be headed for a similar move. The bank took a writedown of $120 million when it placed $719 million of troubled commercial loans in an "available for sale" category. The move drew considerable attention as a "restructuring" charge, which can be excluded from earnings, rather than a charge against the loan-loss reserve.

"Other banks are doing similar things, selling individual loans at a discount in the distressed loan market," says Tom Brown, CEO of

Second Curve Capital

, a New York hedge fund. Still, he said he doesn't expect to see a lot more deals like Fleet's and had mixed feelings about the method. "It's a classic trade-off," he says, adding that banks that sell a lot of loan assets are relinquishing a core part of their business. "The market will react favorably, but you're using up capital." (Brown's fund has a position in Fleet.)

Others think similar deals will get pushed through as long as there's enough demand, particularly given that investment banks would stand to gain from any role they take in such deals. "Sure there will be more deals like this," says David Ellison, fund manager at

Friedman Billings Ramsey

. "They are there to be done. Investment bankers can make money on both sides of doing it."

Robert Albertson, manager and president of

Pilot Financial

, a New York investment fund, said he is not at all skeptical about other deals following. "All you're doing is trying to eliminate ongoing risk to the portfolio," he says. "It's the same game as a decade ago."

In the early 1990s some banks employed a good bank/bad bank strategy, setting up a new bank to liquidate an institution's poorly performing loans. Many analysts have referred to Fleet's latest deal as a new spin on that strategy. In this case, instead of setting up a new bank, Fleet turned to Patriarch Partners to act as the middleman in selling off what are known officially as "collateralized loan obligations."

"It helps neutralize the risk. I would be surprised if one of three top banks don't try to do something similar," said Albertson. The trick, he says, is figuring out what a troubled loan is really worth. "Everyone is trying to guess what the right discount is based on individual credits."