With more than $600 billion of bad loans, foreclosed properties and other assets from failed banks, federal regulators are counting on the private sector to help sell the loans rather than doing so independently.
The FDIC is selling loans in a public-private partnership, where a buyer fronts 20% of the assets' value and tries to work out the loans by reducing the interest rate, extending the maturity, writing off some principal or getting buyers to put up equity. The FDIC, which retains 80% ownership, shares in any gains. In 2009, the FDIC sold $2.45 billion worth of loans, with an original book value of $5.7 billion.
For assets it must sell itself when it cannot find a buyer for a failed bank, the FDIC is hiring auctioneers, recruiting investors directly and even creating its own asset-backed bonds to coax the best possible prices.
James Wigand, deputy director of the FDIC division in charge of the asset sales, said many FDIC staff members are veterans of the savings-and-loan crisis in the early 1990s and remember what worked and what did not. The FDIC at that time created the Resolution Trust Corp. to liquidate failed banks, taking upon itself to sell 89% of the $453 billion in assets it found at 747 failed banks.
Now the FDIC is selling only approximately 11% of the $606 billion acquired from 246 failed banks. The total exceeds the assets of all but the six largest U.S. bank holding companies. The FDIC is requiring healthy banks to shoulder the rest as a condition of getting a collapsed competitors' customers, deposits and branches.
That still leaves a considerable amount to sell itself. To do so quickly and try to fetch higher prices, the FDIC is using several approaches. It sells some through private agencies like The Debt Exchange Inc., a Boston trading platform. DebtX, as the company is known, sells the loans using sealed-bid auctions.
The FDIC also uses the securitization market to offload loans. In March, it sold the first such deal, a $1.8 billion bond backed by loans from Franklin Bank in Houston and Corus Bank in Chicago.
The FDIC's approach has its critics. Larry Meyer of JLM Financial Investments, a distressed-assets trader in Austin, Texas, said the government should do more to speed up the process of getting bad assets off banks' books so they can make new loans instead of managing what amounts to a real estate problem.
But the reality is that in many cases it takes time to simply figure out what assets the banks have because the banks' classifications may differ from those used by the FDIC. There are also assets that may be in litigation, making a sale even more difficult.
Also, the value of the assets has been going up, so no one is in a rush to sell at fire-sale prices. At the beginning of last year, if a commercial mortgage-backed security would have sold at 40% of its value, this year that figure has climbed to 84%, according to a note from Citigroup.
