Friday, June 11, 2010

A Tale of Two Eras: FDIC Tries New Approach To Sell Mountain Of Dead-Bank Assets

Jun 11, 2010 | 2:33PM

By Anusha Shrivastava, Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- The Federal Deposit Insurance Corp. closed down three more failed banks last week, pushing the total amount of dud mortgages and other assets the regulator must dispose of to more than $600 billion.

Rather than try to sell most of the assets itself, as the U.S. government did during the savings and loan crisis two decades ago, the FDIC is passing a large majority of the commercial mortgages and other delinquent debts on to the private institutions that it signs up to take over the failed banks.

For the small percentage of assets it must sell itself when it cannot find a buyer for a failed bank, the FDIC is using a variety of approaches--from hiring auctioneers to creating its own asset-backed bonds--as it tries to wring out the best prices it can.

James Wigand, deputy director of the FDIC division in charge of the asset sales, said the changes spring from the need to deal with the problem in a more effective manner. Many FDIC staff members, including himself, are veterans of the previous crisis--largely the responsibility of the Federal Savings and Loan Insurance Corp. before that agency was closed and its work transferred to FDIC-- and they "remember what worked well and what didn't," Wigand said.

Back then, FSLIC warehoused hundred of billions of dollars of bank assets-- loans for buildings that were never completed or were finished but empty--and sold them through the Resolution Trust Corp., a body it created for this task. The FDIC, by contrast, is focusing on passing along assets to other institutions at the time of a bank's failure, Wigand said.

The difference is stark. The RTC took it upon itself to sell 89% of the $453 billion in assets it found at 747 failed banks in the late 1980s and early 1990s. This time, the ratio is reversed: The FDIC is selling only about 11% of the $606 billion acquired from 246 failed banks. It is requiring healthy banks to shoulder the rest as a condition of getting a collapsed competitors' customers, deposits and branches.

That still leaves a considerable amount to sell itself. To do so speedily and with minimal losses, the FDIC offers the assets for sale through private agencies like DebtX, of Boston, a trading platform. DebtX sells the loans using auctions conducted via sealed bids.

The FDIC has also used the securitization market to offload some of the bank's loans. In March, it sold the first such deal, a $1.8 billion bond, backed by loans from Franklin Bank in Houston and Corus Bank in Chicago.

For more than a year, the banking regulator has been selling some loans through a public-private partnership. In these deals, a buyer pays 20% of the assets' value and tries to work out the loans by reducing the interest rate, extending the maturity, writing off some principal or getting buyers to put up equity.

Once the loans start to perform, the FDIC, which retains 80% ownership, shares in the returns. In 2009, the FDIC sold $2.45 billion worth of loans, with an original book value of $5.7 billion.

The FDIC approach has its critics, some of whom say that by requiring banks to inherit the headaches of failed institutions, the FDIC is inhibiting new lending.

Larry Meyer of JLM Financial Investments, a distressed assets trader in Austin, Texas, said the government should do more to accelerate the process of getting bad assets off banks' books "so they can get back to doing what they do, which is make new loans, instead of managing an acute real estate problem."

It's not quite that simple, Wigand said. "In many cases the assets have poor documentation and were poorly underwritten," he said. "These generally are not pristine assets."

In many cases, it takes time to simply figure out what assets the banks have because the banks' classifications may differ from those used by the FDIC. There are also assets that may be in litigation, making the sale even more difficult.

Also, the value of the assets has been going up, so no one is in a rush to sell at firesale prices. At the beginning of last year, if a commercial mortgage-backed security would have sold at 40% of its value, this year that figure has climbed to 84% of its value, according to a note from Citigroup.

"By law, we have to resolve each failing bank in a manner that minimizes the cost to the deposit insurance fund," Wigand said. "We are not funded by the taxpayer."

-By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227; anusha.shrivastava@