File under Good intentions –> Unintended consequences –> FDIC.
The Federal Deposit Insurance Corporation, the body charged with insuring US bank deposits, has taken over about 200 banks since 2007. The bank failures mean it now has an estimated $41bn of assets (plus other things) on its books. The organisation is keen to sell them off, to generate the best return for taxpayers possible, and is using securitisations and auctions to do so.
But (you knew it was coming) here’s the catch:
March 8 (Bloomberg) — A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.
Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.
According to FDIC about 4 per cent, or $1.64bn, of the $41bn in failed bank assets, are also held by other banks (i.e. not just FDIC). The issue then is whether these banks might have to take writedowns on auctioned loans — to the winning bid price — leading to potential pain for some US banks.
FDIC itself says it’s mandated to achieve the best price possible for US taxpayers. But you can see how banks could think there’s a misalignment of interest, so to speak, between them and the FDIC.
Here’s a bit more detail from James Frischling, President & Co-Founder at NewOak Capital:
“The FDIC’s program to manage the disposition of portfolios from failed banks is intended to maximize the return on these portfolio sales by creating an orderly and transparent process and one that also has a profit-sharing relationship with the winning bidder. However, the program poses a potential threat to other weakened but still healthy banks that may own the same loan as the ones being liquidated at auction. The FDIC’s auctions are resulting in prices on average of 43% on performing loans and 26% on the non-performing . . . The FDIC’s auctions are resulting in prices on average of 43% on performing loans and 26% on the non-performing.”
A 43 per cent writedown on a performing loan could be quite painful for a small, regional US bank.
Hence the outrage currently being expressed by some institutions. It probably doesn’t help that the depleted-FDIC is itself partly financed by the banks, to the tune of some $45bn over the next three years.
Related links:
Failed-bank assets, in pics – FT Alphaville
The mother of all bank re-securitisations? – FT Alphaville
Problem banks continue to cast deep shadow – FT