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Thread: more weekend commentary - 'Stealth' US Taxpayer bailout of FDIC begins in earnest

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    Default more weekend commentary - 'Stealth' US Taxpayer bailout of FDIC begins in earnest

    (snip)"More Failures Coming

    The FDIC is now deep in the red and the situation is getting worse every week. The situation would be even worse were it not for widespread "extend and pretend" tactics that keep woefully insolvent banks in business.

    FDIC Shell Game To Hide Bad Assets

    To address the situation, the FDIC is going to start selling U.S.-guaranteed FDIC senior certificates. However, it has no Congressional authority to do so according to former thrift regulator William Black.

    Unlimited Taxpayer Bailout

    Black claims an "unlimited taxpayer bailout" of the FDIC is on the way.

    Barrons discusses the situation in Uncle Sam Rides Again: Banking on a Bailout?

    BEFORE THE FINANCIAL CRISIS is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks [ bank failures just exceeded 100 for the year this week - sic ]. The rapid closures have drained the agency's cash reserves.

    The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

    Enter the FDIC's Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. [ taxpayer - sic ] guarantee of principal and interest. The program starts with a $500 million issue.

    "They aren't really selling the bad assets. They're selling the equivalent of a Treasury bond without congressional approval," says William Black, a former thrift regulator. "It hides the economic substance of what's really happening—an unlimited taxpayer bailout."

    The FDIC contests the characterization, saying it doesn't expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

    Foot in the Door Ploy

    Notice how the $500 million start gets the FDIC foot in the taxpayer's door. At some point Congress will probably grant authority to the FDIC just as the Fed got unlimited funding for Fannie Mae.

    President Obama and the Democrats are making matters worse by permanently upping the FDIC limit to 250,000 in the financial reform legislation that just passed.

    Moral Hazards

    FDIC is a moral hazard. Many banks that failed were able to stay in business because of taxpayer deposits at above market rates. For example, no one in their right mind would have had deposits at Corus Bank, a bank with many troubled loans to Florida and Nevada condo developers.

    Corus bank would have failed long before it did, without the FDIC guarantee. Not only was the bank able to attract funding by offering above market rates, Corus contributed to the enormous property bubble in Florida and other places.

    Instead of preventing risky bank practices in the first place, or upping the insurance rate on risky bank practices to cover excessive risk, the FDIC is about to get an unlimited taxpayer sponsored bailout by selling U.S.-guaranteed FDIC senior certificates, even though it has no authority to do so.

    FDIC Legacy

    As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time.

    Taxpayers will be the ones to pay the price. This is the legacy of FDIC and its failed moral hazard policies.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com"(snip)

    from

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    Default Re: more weekend commentary - 'Stealth' US Taxpayer bailout of FDIC begins in earnest

    and the US taxpayer is actually on the 'hook' for far greater losses thanks to 'Loss Sharing Agreements' ....


    (snip)Friday evening, July 23, 2010, the FDIC announced seven more bank failures, bringing the totals to 103 so far this year and 270 since 2007. The seven banks closed this week had collective assets of $2.16 billion and deposits of $2.02 billion.

    Their closings cost the FDIC an estimated $431 million, about 21% of deposits. So far this year, bank closings have cost the FDIC an estimated $18.55 billion.

    Five of the seven closings were accomplished with the FDIC entering into loss-share agreements with the acquiring banks. That means, in effect, that the FDIC makes a guarantee to the acquiring bank that assets it has taken over from the failed bank will not decrease in value beyond a pre-agreed limit.

    In connection with those five closings this week, the FDIC entered into loss share agreements covering an additional $1.25 billion in assets. So far in this crisis, the FDIC has entered into loss share agreements covering about $180 billion.

    How Loss Share Agreements Figure Into Bank Failures:

    Loss share agreements save the FDIC money at the time of the closing, because the FDIC does not have to pay the acquiring bank as much money up front to honor the failed bank’s deposits. However, a loss share agreement is by nature a bet.

    The FDIC is betting that over the next ten years, the failed bank’s assets will turn out to be worth more than any party was willing to bid for the assets at the time each bank was closed. Future asset values are calculated net of selling expenses, meaning that things like foreclosure costs, property taxes, utilities and maintenance fees paid by the acquiring bank in disposing of the assets is deducted from their eventual sales price.

    This is why it is important to keep track of the total value of assets the FDIC has guaranteed under loss share agreements throughout this financial crisis. It is similar to keeping track of the total dollar value of mortgages guaranteed by Fannie Mae or Freddie Mac. The two major distinctions are that the FDIC’s assets under loss share are, by definition, distressed assets and their value has already been significantly discounted.

    The FDIC’s future exposure lies in the possibility that these assets may turn out to be worth even less than the discounted value agreed to at the time of each bank failure. This is a distinct possibility; otherwise the acquiring bank would not insist on the loss share agreement. In the event the assets turn out to be worth less than the amount agreed to by the parties up front, the FDIC’s losses could grow dramatically beyond its original projections.

    Remember, the assets in question are illiquid and difficult to value, and their future value depends in large part on how this financial crisis plays out. You can bet the FDIC’s loss projections assume the current downturn is over and we will be experiencing income growth, less foreclosure activity and recoveries in the residential and commercial real estate markets going forward.

    The parties that have acquired these assets under loss share agreements can afford to be indifferent as to what happens going forward. They are protected either way.

    This is yet another avenue of quantitative easing. The US Treasury, by way of the FDIC, is guaranteeing a value for the Country’s most distressed bank assets much higher than anyone is actually willing to pay for them. In the process, it is helping disguise how “worth-less or worth-little” (Jim’s words) these assets have become.

    More Evidence of FASB-Blessed Overvaluations:

    Each bank failure announcement allows us a peek into how extensively bank management have been exaggerating the value of their least liquid assets since the FASB’s roll-back last year of fair value accounting requirements. Four of the worst examples of asset overvaluation exposed by this week’s closings were as follows:

    SouthwestUSA Bank, Las Vegas, Nevada, had stated assets of $214 million and deposits of $186.7 million. The FDIC estimated its closing cost $74.1 million (40% of deposits). Based on that estimate, the bank’s assets were really only worth $112.6 million, and had been overvalued by 90%.

    SouthwestUSA Bank’s situation was so bad, the acquiring bank was only willing to take over $137.3 million (stated value) of its assets, with its losses on $111.3 million of those assets limited by a loss share agreement with the FDIC. The FDIC had to take the remaining $76.7 million (stated value) of assets onto its own books for later disposition. Under these circumstances, the FDIC’s loss estimate could only be called a “guesstimate,” because its eventual losses are made uncertain both by the loss share agreement and the difficulty gauging how much it will be able to realize on the sale of the assets it was forced to take over.

    Crescent Bank and Trust Company, Jasper, Georgia, had stated assets of $1.01 billion and deposits of $965.7 million. The FDIC estimated its closing cost $242.4 million. Based on that estimate, the bank’s assets were really only worth $723.3 million, and had been overvalued by 40%.

    Thunder Bank of Sylvan Grove, Kansas, had stated assets of $32.6 million and deposits of $28.5 million. The FDIC estimated its closing cost $4.5 million. Based on that estimate, the bank’s assets were really only worth $24 million, and had been overvalued by 36%.

    Community Security Bank of New Prague, Minnesota, had stated assets of $108 million and deposits of $99.7 million. The FDIC estimated its closing cost $18.6 million. Based on that estimate, the bank’s assets were really only worth $81.1 million, and had been overvalued by 33%. "(snip)

    from

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