FDIC Strangely Resembling A Private Investor

FDIC Strangely Resembling A Private Investor

The Federal Deposit Insurance Corp. is looking for a few good business partners.

The beleaguered federal agency, hammered by this year's spate of bank failures, is getting creative to sell off its growing portfolio of commercial real estate properties from failed banks. In fact, it's taken to partnering with some of the most prominent -- and notorious -- private equity firms on Wall Street.

Today, the Wall Street Journal reports that the FDIC is about to announce the winning bidder of the second-largest bulk sale of commercial property in its history. The winner is expected to be one of finance's private equity titans.

The sale consists of a portfolio of nonperforming loans from commercial real estate properties issued by defunct lenders Corus, Franklin and IndyMac. As the FDIC fund that insures bank deposits has teetered into the red this year, the agency has been scrambling to raise some cash from a vast array of bank assets.

In the past, the FDIC has offered sweetheart deals to entice buyers to take on the assets of failed banks. In an arrangement called "loss-share" the FDIC, often agrees to assume up to 80 percent of losses when buyers take on a failed bank's assets. Critics argue that the arrangements offer very little, if any, risk for the investors. Worse, taxpayers stood to gain nothing if the investments gained in value.

In the recent round of deals, however, the FDIC is entering into direct partnerships with buyers and retaining a long-term equity stake in the loan portfolios. (It's a tactic used by the agency during the S&L crisis.) Though they've put taxpayers in the position to earn a return on the sale of assets from failed banks, the FDIC is now in the potentially awkward position of being in business with private equity "vultures."

To put it differently, the FDIC is effectively acting like a private investor.

Here's the WSJ:

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...

Who's the FDIC partnering with? We'll give you a hint: think "barbarians at the gate."

As banks are wary of increasing their exposure to the commercial real state market (and wary of having the government as a partner) private equity firms are stepping up to grab bank assets.

Take hedge fund billionaire John Paulson, for example, who undoubtedly knows a great deal when he sees one. (He's already made $15 billion in one year betting that the housing market would crash.) Paulson is also one of the investors in the bank OneWest, which took on most of the assets of the failed lender IndyMac. If this Bloomberg story is correct, then OneWest has already made a killing on IndyMac:

Private-equity firms bought at least two other collapsed banks this year: Florida's BankUnited Financial Corp., which got a $900 million infusion from Carlyle Group, Blackstone Group LP, Centerbridge Capital Partners LLC, and W.L. Ross & Co.; and Flagstar Bancorp Inc. in Michigan, which got $350 million from MatlinPatterson Global Advisers LLC.

From the initial $1.55 billion investment in March, [John Paulson's] OneWest's equity rose to $2.8 billion as of Sept. 30 as the market value of its loans and other assets increased, according to FDIC regulatory data.

A few obvious questions arise:

If the banking sector is still hoarding cash, reeling from loan losses and not lending, shouldn't they be taking on these seemingly low-risk, government sanctioned deals?

Are private equity firms -- who've been widely criticized for mass layoffs and downsizing -- the right kind of buyers for troubled bank loans? Shouldn't actual banks be better equipped and better trained to deal with bank assets?

And, maybe most importantly, should government agencies have a long-term financial stake in private properties or loans? Doesn't that create a powerful conflict of interest?


Get HuffPost Business On Facebook and Twitter!

Popular in the Community

Close

What's Hot