Good to watch for your bank to publish whether their deposit insurance is underfunded. For 140 banks their was no warning.
- Erik
FDIC Receives Welcome News - Mulitple Bidders For Troubled Loan Portfolio
December 24th, 2009 • Related • Filed Under • by Christopher
The FDIC has received bids from over a dozen investors for a $1.1 billion dollar package of commercial real-estate loans that they acquired from various failed banks.
The portfolio consists of mostly nonperforming commercial property loans. Demand for these assets, at a discounted price, has grown intense. Investors have amassed billions of dollars to buy distressed loans and property much as investors like Sam Zell did in the early 1990s.
"A lot of investors are anxious to invest cash they have raised," said David Tobin, a principal with Mission Capital Advisors, a loan-sale adviser.
The increased demand is welcome news for the FDIC, which is selling the portfolio of loans at a discount, while trying to limit taxpayer losses and shore up its deposit-insurance fund.
Some analysts are optimistic the price may get driven up from competing bidders.
The sale comes during a time when the FDIC is facing unprecedented challenges which make this sale the equivalent of putting a finger in the dike. As banks continue to fail, along with the estimated costs of those failures, the FDIC is urgently seeking to replenish their deposit insurance fund, which was showing a negative $8.2 billion balance at the end of September.
So far, the financial crisis has swallowed up 140 banks, leaving the FDIC with about $30 billion in real-estate debt that is available for sale for the next 12 months. That figure is double the level from a year ago.
As such, the portfolio represents only a fraction of the real-estate loans held by the FDIC.
Other banks, notably community and regional banks, have not yet marked down their existing loan portfolios to current market rates. Many of these banks hope that the low cost of funds offered by historically low interest rates will let them earn their way out of trouble.
In most FDIC deals involving failed banks during the current downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed. But for some failed the FDIC has decided to sell some hard-to-value assets separately.
These bulk sales use a public-private partnership structure pioneered by the Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess in the early 1990s.
The set-up enticed private investors to buy distressed real-estate assets while giving the government the opportunity to make money on behalf of taxpayers should the assets rise in value.
Since last year, the FDIC has sold residential and commercial loans through eight such partnerships, with the agency's equity interest ranging from 50% to 80%. Those partnerships bought loans at discounts ranging from pennies on the dollar to more than 50 cents on the dollar of face value.
These structured deals, however, carry additional risk for the FDIC and, by extension, taxpayers. Because the agency takes a big chunk of the equity and provides financing, it stands to lose more if the markets continue to decline.
Under the options being considered for the $1.1 billion package, the FDIC would likely hold a 60% stake and provide financing. Deutsche Bank AG is advising the FDIC on the auction.
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