The FDIC Jumps into the Securitized Asset Business While Still Failing at Their First Business

Library of Congress photo, LC-USF34- 028362-D

The FDIC needs to come up with some cash so instead of sitting on all that crappy left-over collateral, they're going to try to get some loans. Yeah. That's exactly the point of "deposit insurance" I'm sure.

Business Week:
The Federal Deposit Insurance Corp. sold $1.38 billion of guaranteed notes backed by construction loans and seized property from a failed bank, according to a person familiar with the offering.

The debt was broken into three parts, with an $850 million portion that matures no later than October 2012 pricing to yield 21 basis points more than interest-rate swaps, said the person, who declined to be identified because terms aren’t public. Barclays Capital underwrote the sale, the person said.

The debt represents part of the assets the FDIC acquired after seizing Chicago-based Corus Bank in September, the person said. The offering was one of two sales planned for this month of bonds tied to loans the FDIC sold partly last year through so-called structured loan sales, people familiar with the matter said last month.

The pace of bank failure will “pick up this year and is going to exceed where we were last year,” FDIC Chairman Sheila Bair told reporters last month.

Last week the agency sold $1.81 billion of guaranteed debt backed by mortgage securities from failed banks, as it begins to tap the bond market to raise cash after the collapse of 193 banks since 2007. The FDIC also may sell bonds linked to the assets of Houston-based Franklin Bank this month, the people said.

Apparently investors are foaming at the mouth for a piece of this FDIC-guaranteed action, so says WSJ:

This issue is backed by non-agency mortgage-backed securities.

The top-tier floating-rate notes with a size of $1.33 billion is talked in the area of 65 basis points over one-month Libor.

The lower-rated fixed rate notes with a size of $480 million is in the area of 90 to 95 basis points over a different benchmark.

The initial price talk on the deal had both classes in the area of 75 basis points. Now, the guidance shows a tightening of 10 basis points on the floating-rate tranche, while the fixed-rate class widened by almost 15 to 20 basis points.

"The interpretation of the underlying collateral is that going forward, investors have a better appetite for floaters, while with fixed rate there's fear that interest rates will go up when government ends its various programs," said Jim Harringotn, senior portfolio manager at Ryan Labs Asset Management.

The FDIC guarantee on this issue, the first of its kind for a structured issue, creates a new class of securities raising questions in investors' minds on what the comparables would be.

"We've not seen anything like this before," Harrington said. "So it offers a number of different mindsets."

We've certainly never seen anything like this before (this is the part where you imagine JDA's hipster ass staring at the computer screen with WTF written across her face).

The FDIC is scraping its collection of failed bank assets to package ABSs with a federal guarantee against loss, surely that sort of well-thought-out crackpot scheme can't go badly?

Perhaps the FDIC wouldn't have to replenish its coffers so often if it weren't trying so hard to "regulate" - so much so that it actually seized Waterfield Bank in Maryland (bought by Affinity Financial in 2008 - and we all know what happened to Affinity) instead of allowing Affinity's majority owners to sink their own capital into the bank to resolve the FDIC's threat of closure. Check out LA Times:

[P]eople involved with Affinity and the bank said the biggest problem was regulators' discomfort with its unusual Internet-based business model. This involved taking deposits indirectly through the websites of so-called affinity groups -- big companies, insurers and associations -- including automaker BMW, the advocacy group AARP and the American Medical Assn.

The FDIC regarded the affinity-group deposits as a less-stable source of funding than deposits from core customers of the bank. The bank had $156.4 million in deposits.

The differences between the bank and its regulators proved so great that when the wealthy Waterfield family, Affinity's majority owners, offered to recapitalize the failing bank with funds from a family trust, the regulators rejected the offer, according to two people with personal knowledge of the situation. These people spoke on condition of anonymity because they have other dealings with bank regulators and feared offending them.

Officials at the FDIC, which is charged with minimizing losses to the deposit insurance fund, did not respond to requests for comment. The OTS declined to comment.

The deal cost the FDIC $51 million (the OTS seized the S&L and handed them off to the FDIC March 5th). Since Waterfield was a savings and loan, perhaps it's not their problem. They'd been on the OTS's bad behavior list for quite some time but I guess owners coming up with their own money doesn't equal that cash money regulators like so much. Grease up that finger and let's get ready to point!

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


OldSouth said...

What could possibly go wrong?

FDIC really shouldn't bother with this at all. FDIC has a line of credit with US Treasury who then borrows required funds from Japan, China, Russia, Middle East, et. al. Then, this debt is refinanced and rolled over when it comes due. Free kick the can down the road money! It's all good, just ask George W. Bush, he used the same foreign financing method to fight wars, no problem!


Exactly. Why get creative about it? It's not like Japan, China, Russia and the "Caribbean Banking Centers" don't WANT anymore of that kick the can down the road money, right?