Wednesday, July 15, 2009

CREFA Market Commentary

The FDIC bank takeovers are actually not as opaque as we originally thought. The FDIC has actually posted the purchase and sale agreement on FDIC website, very detailed and transparent. We took a quick look at BankUnited's deal. As an example, the loss sharing agreement on BankUnited residential mortgages of about $10B covers $4B in losses, or a 40% loss rate. It looks like the price was determined based on this big loss factor which is covered 80/20 by the FDIC and 95/5 after the $4B threshold. For this reason, we doubt BankUnited will be the last FDIC bank Private Equity bids on.

We saw an article in the WSJ this week about Private Equity pushing back on the stricter rules around PE ownership of Banks. We think it is a good idea to continue to shed some light on the Bank transactions and where they are going. Private Equity did not like higher capital and longer holding period requirements. Private Equity obviously, wants to trade and trade quickly with a maximum amount of leverage.

Private Equity and other groups are circling Corus Bank to buy the Bank’s condo loans or the whole institution. Corus has been on the precipice for a few years. Some of these investors are waiting for the Fed to declare the bank dead, at which time the best deal may be made with the FDIC.

PPIP press coverage appears to be waning and it is almost like the public has moved on and is bored with the PPIP whole loan program since the program has apparently fizzled.

The Government is not sure how transparent the PPIP securities trades would be because these might (we are speculating) indicate true securities values and perhaps necessitate bank write downs. Institutions are trying to minimize downward pressure on securities prices.

Wells Fargo recently sold privately $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital for 35 cents on the dollar, about twice the price hedge funds were offering.