FDIC Tries New Approach To Sell Mountain Of Dead-Bank Assets – UPDATED
By Anusha Shrivastava – Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- As they did two decades ago, U.S. federal regulators are holding a mountain of assets seized from failed banks. This time, however, they are relying more on the private sector to hold and sell more of the $600 billion in dud loans, foreclosed buildings and other assets.
Rather than try to sell most of the assets itself, as the government did in the early 1990s after the savings-and-loan crisis, the Federal Deposit Insurance Corp. is passing most of them on to the private institutions it signs up to take over failed banks.
For those assets it must sell itself when it can’t find a buyer for a failed bank, the FDIC is hiring auctioneers, recruiting investors directly and even creating its own asset-backed bonds to try to wring out the best prices it can.
James Wigand, deputy director of the FDIC division in charge of the asset sales, said many FDIC staff members, including himself, are veterans of the previous crisis and “remember what worked well and what didn’t.”
The difference is stark. The Resolution Trust Corp., a body created to liquidate failed banks’ assets, 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. Now the FDIC is selling only about 11% of the $606 billion acquired from 246 failed banks. The total exceeds the assets of all but the six largest U.S. bank holding companies.
The FDIC 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 try to fetch higher prices, the FDIC is using several approaches. It sells some through private agencies like The Debt Exchange Inc., a Boston trading platform. DebtX, as the company is known, sells the loans using sealed-bid auctions.
The FDIC also uses the securitization market to offload some 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 FDIC also has been selling loans in a public-private partnership. In these deals, a buyer puts up 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. The FDIC, which retains 80% ownership, shares in any gains. In 2009, the FDIC sold $2.45 billion worth of loans, with an original book value of $5.7 billion.
The FDIC’s approach has its critics, some of whom say that by requiring banks to inherit the headaches of failed competitors, the agency 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, says the FDIC’s Wigand. “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 fire-sale 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%, 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.”
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