Tuesday, February 9, 2010

FDIC Problem Loan Portfolio “Financing” Strategies Analyzed

FDIC Multibank Structured Transactions:

FDIC financing provided for the Multibank Structured Transactions (large “structured” FDIC assets sales) increases the capitalization or perceived sale proceeds of an asset sale transaction versus a lower “all cash” transaction. It allows the Managing Partner of the newly formed venture (an LLC), entered into with the FDIC, to leverage their return as well. The FDIC hopes to realize higher gross assets values over the much extended investment horizon of the structured sale (five years plus) rather than receiving a lower cash yield in today’s depressed CRE market.

FDIC Loss Sharing:

Likewise, under Loss Sharing, the FDIC provides initial cash subsidy to the acquiring bank (gobbling up the failed bank), credit enhances the failed bank problem portfolio by way of subsidizing the losses of the acquiring bank over time “in trade” for an extended resolution time horizon and the hope of a higher “unstressed” resolutions. In a Loss Sharing Agreement, the acquiring bank “warehouses” problem loans that will be slowly restructured or refinanced (or foreclosed on) at a later date, when economic conditions are forecast to have improved. The acquiring bank is, in essence, "financing" a portion the FDIC problem assets by taking an IOU or receivable from the FDIC for future possible losses that the FDIC hopes it will not need to pay back because the market and values will have bounced back.