|
As the Wall Street Journal reports this morning, in what are called a
"loss-share" agreements, buyers of failed banks
are getting billions
of dollars in government guarantees to snatch up the bank's bad
assets. To entice buyers, the Federal
Deposit Insurance Corporation is
offering to cover around 80 percent of the losses associated with
buying a bank. The
result, the WSJ points out, is a massive subsidy to
the private equity industry, and a huge risk to the American taxpayer.
As
bank failures have mounted this year, much has been made of the
FDIC's dwindling Deposit Insurance Fund. But, as the WSJ
reports, the
FDIC's potential risk through loss-share agreements "is about six
times the amount remaining in its fund
that guarantees consumers'
deposits."
Though the WSJ doesn't go so far as to say the enormous guarantees
are,
in fact, sweetheart deals, it's hard to imagine a better scenario
for bank buyers. (Except maybe the FDIC offering to guarantee
100
percent of the total losses associated with buying a failed bank.)
The FDIC, which first turned to loss share
agreements during the S&L
crisis in the early 1990s, maintains that the guarantees are much less
costly than liquidating
a failed bank's assets. Still, examine the
WSJ's accounting of the sale of Alabama's Colonial Bank earlier this
month:
"The FDIC, assuming its traditional role, brokered a sale of the
bank's deposits to BB&T Corp., ensuring that
customers wouldn't see
any interruption. It also agreed to help BB&T buy a $15 billion
portfolio of Colonial's loans
and other assets by agreeing to absorb
more than 80% of future losses. Under the deal, the most BB&T can lose
is
$500 million, the bank says, and that is only in the unlikely event
that the entire portfolio becomes worthless. The FDIC
is on the hook
to cover the rest."
That's right, BB&T can only lose $500 million on a $15 billion
investment.
Which is why many buyers of failed banks are ecstatic over
the details of these deals, even if it means taking on shoddy
mortgages,
commercial loans and other under-performing assets. To wit,
this testimonial from Wilshire State Bank CEO Joanne Kim: "After
we
understood how [the loss-share] works, we were literally overjoyed."
|
