BNE Bailout Estimate Is Defended

FDIC Says $2.5 Billion Cost Includes Return of Loans

WASHINGTON -- The Federal Deposit Insurance Corp. is standing by its original $2.5 billion cost estimate for the Bank of New England bailout.

Some analysts have said the agency's actual cost will be closer to $5 billion, making it the FDIC's costliest bank resolution ever.

They argue that the FDIC's losses jumped significantly last week when BNE's acquirer, Fleet/Norstar Financial Group, announced that it is returning to the FDIC $2.5 billion in bad assets that had belonged to the failed bank.

Prospects for Upward Leap

The greater the amount of the failed bank's assets that are "put back" to the FDIC, the higher will be the agency's costs.

But Harrison Young, the FDIC's director of resolutions, said Friday that the agency had assumed Fleet would return about $2 billion, the cost included in its original estimates.

BNE had a total of $21.5 billion in assets when it failed in January. As an inducement to the purchaser, the FDIC kept $5.5 billion of the worst assets when it sold the bank on April 22. Fleet was also given the option of returning any of the remaining $15 billion in assets that go bad over the next three years.

Close Watch on Givebacks

Rep. Jim Leach, R-Iowa, asked regulators at a hearing last week if the 60% increase in assets returned would raise the cost by 60%.

James Barton, an examiner with the Office of the Comptroller of the Currency, said: "That very well may happen."

It hasn't yet, said Mr. Young on Friday. However, if Fleet's givebacks escalate, the FDIC's costs will go up, he acknowledged.

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