What conclusions can we draw about the first quarter of 2010?
The loss sharing mechanism has dampened the potential for rampant private sector speculation that priced and cleared assets on a massive scale in the previous crash via RTC and FDIC asset sales. FDIC loss sharing intentionally encourages a slower, more methodical and patient approach to the resolution of individual assets, an investment regime private equity is not as accustomed to. In the case of most of the 2009 activity there has been little or no individual asset price discovery. We do know that in 2009 $2.5 billion of outright FDIC loan sales yielded 43.2% of book value overall, ranging from 26.4% of book paid for non-performing loans to 57.3% paid on performing loans. With such limited 'outright' asset sales, asset pricing is not particularly indicative given that loss sharing transaction volume is approaching a whopping $140 billion cumulatively.
The data points or the “moving parts” of the loss sharing agreements available for our view in FDIC-assisted whole bank sales are: total bank assets, loss sharing assets, DIF cost, asset and deposit bid premiums or discounts and stated thresholds contained in the agreements. 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. One very, very rough metric indicated by the FDIC data in the first quarter of 2010 might be, as measured by DIF cost to failed bank asset ratio, that the FDIC assets being transferred to the new banks are worth roughly 30% less than book. It could be more or could be less in the end. Each whole bank sales structure is unique. The ultimate economic outcome won’t be known for 3-10 years because of the way loss sharing agreements are structured to slowly and methodically resolve the individual problem assets.
If we boil it down, loss sharing is a variation of the ‘good bank/bad bank’ structure, the transferred ‘bad bank’ assets are now nested within healthier FDIC -assisted banks for the near to long term while asset prices firm and hopefully rise before they are ultimately resolved. In the first quarter of 2010 the markets have settled down. Economic recovery is widely believed to have begun. The hysteria of 2008 has subsided for now, allowing for an orderly transfer of bad bank assets to the private sector. The FDIC has complete confidence in the success of the approach, so much so that there is talk that they may be modifying the terms of the deals in the agency's favor by eliminating the provision where the FDIC would cover 95% of losses after the threshold loss amounts are reached.