Wednesday, July 7, 2010

Comparing Recent US Financial Meltdowns: The FDIC is no RTC

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.  The cost avoidance calculations are hard to see. 2009 failures totaled $171 billion in assets of 140 failed banks at a DIF cost of $36.4 billion. 

In the current age of greater electronic transparency, we are able to see more of the minutiae contained in our financial system. 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 first half of 2010 alone 86 banks failed with a total of over $70 Billion in combined assets. The FDIC entered into loss-share transactions covering roughly $50 Billion of failed bank assets or nearly 70% of failed asset total. 

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.  And the FDIC is no RTC. Outright sales into the distressed asset marketplace have been avoided this time around.

As Anusha Shrivastava, Of DOW JONES NEWSWIRES commented last month:  “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.”

Shrivastava  continues: “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.”

We believe that the FDIC-assisted activity is seen by the surviving (thriving) banks as a once in a generation growth opportunity, not a burden. Failed bank bidding is fierce.  As the US banking  industry consolidates in a big way, it is preferable to be the predator rather than the prey.