WASHINGTON — The Federal Deposit Insurance Corp. finally found a buyer for IndyMac Federal Bank, but the agency will retain much of the risk — and potential reward — on a big chunk of the thrift's assets.
"The reason we're doing what we're doing is to share in the upside recoveries," said James Wigand, a deputy director in the FDIC's division of resolutions and receiverships.
Mr. Wigand led the agency's negotiations with a group of investors led by Steven Mnuchin, head of Dune Capital Management LP. The group paid $1.6 billion in cash to fold IndyMac into a new holding company.
But it convinced the FDIC to share 80% of the losses on roughly $13 billion of loans. The agency also retained an 80% stake in a separate $2 billion portfolio of mostly construction loans and will benefit if the value of those assets rebounds.
"There are certain asset types within a bank right now that a buyer is going to view as holding more embedded risk than other asset types," Mr. Wigand said, but the market has "heavily discounted what the value of those are due to uncertainties and liquidity. We think … the discount is pretty severe."
The FDIC is increasingly turning to loss-sharing and participation models as it plows through a growing pile of failed banks' assets.
For instance, on Wednesday the FDIC said it sold $558 million of residential mortgages to an affiliate of Private National Mortgage Acceptance Co. LLC, a buyer and servicer of distressed mortgages. (The loans had been held by First National Bank of Nevada, which federal regulators closed in July.)
Stanford Kurland, PennyMac's chairman and chief executive, said in an interview that the FDIC retained a participation interest in the mortgages, essentially sharing in a percentage of the cash flow and profits as the overall portfolio's quality improves.
"A lot of the transactions coming out of the FDIC have some type of structure where there's aligned interest," said Mr. Kurland, the former No. 2 executive at Countrywide Financial Corp., now part of Bank of America Corp. Though the FDIC and PennyMac will share in profits from the portfolio, PennyMac's equity ownership increases "once we reach certain goals," Mr. Kurland said. The FDIC's "participation steps down as our equity ownership steps up," he said.
A similar clause kicks in under the IndyMac deal for the thrift's new owners.
The IndyMac arrangement was primarily focused on construction loans, but the PennyMac deal marked the first time the agency had engaged in a participation on residential mortgages.
Mr. Wigand said loss-sharing and participations, which the agency used extensively in the savings and loan crisis 20 years ago, have worked. "We did a lot of partnerships, and it turned out very well for the government," he said.
Others said the FDIC may have few choices in resolving certain failures. In the case of IndyMac, it "was an institution that made a lot of loans that are now questionable," said Laurence Platt, a lawyer in the Washington office of K&L Gates. "A buyer is saying, 'I'm willing to purchase them at some price, but I'm not prepared to take a risk of loss that's greater than what I'm paying you.' "
Efforts to sell IndyMac were hurt by Treasury Secretary Henry Paulson's Nov. 12 announcement that he would not use the Troubled Asset Relief Program to buy illiquid assets, observers said. With the government out of the market for bad assets, sources said the FDIC will have to use more loss-sharing and participations.
"There will be interest on the part of private equity to come into banking situations where they can cap their losses, and have the government participate in future losses that may occur," said James M. Rockett, a partner at Bingham McCutchen LLP in San Francisco.
The approach allows the agency to move a failed bank back into private entities that can manage the assets and conserve the agency's resolution resources, which are being stretched as the pace of bank failures picks up.
"The FDIC, even in order to get a group to take it, had to provide some pretty significant support in terms of a willingness to absorb future losses," said Oliver Ireland, a partner at Morrison & Foerster LLP and a former Federal Reserve Board lawyer.
It also preserves some upside for the agency.
"If assets such as those on IndyMac's balance sheet had to be sold in the market today, they would receive much less than what the FDIC — working them out over time through a participation agreement or loss-sharing agreement — believes they could be worth," said Robert Hartheimer, a former director of the FDIC's resolutions division and now a special adviser to Promontory Financial Group LLC.