Tuesday, April 6, 2010

The FDIC Loss Sharing Experience from the Last Big Crash to the Present Crisis:

Comparing Financial Meltdowns

In the last big financial meltdown of the late 1980’s and early 1990’s “The FDIC used loss sharing a total of 16 times to resolve 24 banks that failed between September 1991 and January 1993. Those 24 failed banks had total assets of $41.4 billion, of which approximately $18.5 billion were covered by loss sharing.” This is against the backdrop of a total of $565 billion of assets associated with bank and saving and loan failures spanning the period of 1989 through 1995 resulting in RTC and agency costs totaling about $108 billion.

More recently, “through year-end 2009, the FDIC has entered into 94 loss sharing agreements, with $122 billion in assets under loss share. The estimated savings exceed $29 billion, compared to an outright cash sale of those assets” according to the agency (2009 failures totaled $171 billion in assets of 140 failed banks at a DIF cost of $36.4 billion). The wholesale shift to loss sharing as a resolution strategy was rolled out, in force, in 2009. In addition to loss sharing, a total of $5 billion in loan and asset "outright cash sales" and $10 billion in structured deals entered into in 2009 adding up to about $150 billion of gross 2009 FDIC 'transactions'.

In the current age of greater electronic transparency, we are able to see more of the minutiae contained in our financial system. In the first quarter of 2010 alone 41 banks failed with a total of $22.8 Billion in combined assets. The FDIC entered into loss-share transactions in 35 cases covering a total of $15.4 Billion of failed bank assets or nearly 70% of failed asset total. The total First Quarter cost to the Deposit Insurance Fund ("DIF") was $6.725 Billion. Current use of the loss sharing mechanism has dwarfed the use of the tool in the last big meltdown that took place in the early 90’s.