Government and Legislation: FDIC Says it Will Split Assets of Failed Banks to Generate Bids

Spokesman for the FDIC, Andrew Gray announced today in a statement that the Federal Deposit Insurance Corp. has a strategy in place to take the performing assets of failed banks, along with the bad loans, and separate them in order to attract possible buyers.

What that would do is enable the government to help potential buyers with losses who are willing to take on some risk.

“FDIC staff has referred to a ‘good bank/bad bank’ model described as the sale of the failing bank’s better assets wrapped with loss-share coverage to another bank and the sale of the ‘bad’ assets,” into a limited liability company, said Gray.

Gray added that the FDIC is now taking the steps to implement the plan and go ahead with these types of sales.

How the risk factor for higher risk loans is decreased for the potential buyer, is the FDIC will share in any of the losses incurred from any of the bad loans bought at auction from the failed lenders, included in an agreement from the agency at the time of acquisition.

According to Gray, these types of structured transactions and sharing of losses “are proven ways to maximize bidder interest and value.”

Some of the banks loans included in the auction which the FDIC is going to share potential losses with buyers are IndyMac Bancorp. Inc., Security Bank Corp. and BankUnited Financial Corp.

This is a continuation of the way the FDIC has shared in bad bank loan losses since the debacle of the savings-and-loan industry, so it’s not new in that sense, but the number of failed bank loans now overwhelms that difficult time.

Earlier in June, the FDIC ended up postponing the loan-buying part of the Public- Private Investment Program (PPIP), because banks at that time were able to access enough capital without having to sell off their bad loans. The FDIC said they’re going to try do to the same thing with the failed banks when attempting to auction bad loans.

Next month a program, also under PPIP and run by the Treasury Department, will partner with private investors to acquire mortgage-backed securities as well.