Wednesday, February 24, 2010

A Tale of Three Deals: FDIC Transactions are Evolving

FDIC’s First Generation Deals

The failure of IndyMac on 7.11.08 was among the first wave of bank failures occurring at the very beginning of the recent financial meltdown that spanned the last two years. The FDIC took over IndyMac Bank then sold the bank and assets to OneWest (sale closed on 3.19.09).

As evidenced by the 180 failures that have followed IndyMac, the FDIC's response and the structure of failed bank transactions have continued to evolve during this turbulent financial period.

In all likelihood FDIC took a big haircut on the asset when sold to OneWest (OneWest agreed to purchase all deposits and approximately $20.7 billion in assets at a discount of $4.7 billion). Given the sorry state of the economy and financial markets mid 2008, the assets were marked down dramatically. Overreaction was the natural reaction in 2008.

The FDIC’s February 12, 2010 press release indicates that there is no "loss sharing" on the first tier of the deal with OneWest. Only after $2.5 billion in losses will the FDIC reimburse OneWest.

"Loss Sharing" is a public/private partnership between the FDIC and a healthy bank where the FDIC covers an amount of the losses incurred by a bank acquiring failed bank assets in exchange for possible upside to be shared with the FDIC that might result from the acquiring bank's expert asset management and improved economic conditions.

As the FDIC stated: “OneWest has not been paid one penny by the FDIC in loss-share claims. The loss-share agreement is limited to 7% of the total assets that OneWest services, and OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets….The FDIC has yet to make a single loss share payment to OneWest.”

OneWest has $27 billion in assets according to the OneWest website.

New Generation Deals

Operating more like an investment bank, today the FDIC more often than not arranges the merger of healthy and failing banks and does not take over the failed bank prior to the sale to a third party. This is considered the less costly path. And the financial markets are more settled, for now.

The First Federal (closed 12.18.09) and La Jolla Bank (closed 2.19.10) sales to OneWest are the latest generation FDIC deals. The FDIC sold all deposits and most assets were purchased by OneWest Bank in California. The FDIC and OneWest agreed to share future losses on most of the assets.

In the case of the La Jolla Bank failure, the FDIC and OneWest agreed to share future losses on $3.3 billion of the La Jolla Bank's assets. In this transaction unlike IndyMac, realized losses on the initial tranche will be shared 80% by the FDIC and 20% by OneWest beginning with the first dollar of realized losses. In the case of the COMMERCIAL AND OTHER ASSETS SHARED-LOSS AGREEMENT of the La Jolla Bank sale, the “Stated Threshold” or potential first loss tranche total just over $1 billion.