Cash-short FDIC backstops vulture bank investors with guarantees

The FDIC has taken the government guarantee one step further as it runs out of money. The cash-strapped insurer, which has $10.4 billion on hand, has promised to backstop up to $80 billion in assets in 50 deals — although it expects to pay out only about $14 billion, the Wall Street Journal reports today. The FDIC says it has no choice: Neither healthy banks nor private equity investors will take on assets from the zombie banks unless the government offers a helping hand. And when you think about it, why should only the too-big-to-fail banks get government backing?

Through more than 50 deals known as “loss shares,” the FDIC has agreed to absorb losses on the detritus of the financial crisis — from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency’s total exposure is about six times the amount remaining in its fund that guarantees consumers’ deposits, exposing taxpayers to a big, new risk.

via Raft of Deals for Failed Banks Puts U.S. on Hook for Billions – WSJ.com.

FDIC is betting that the loss-sharing deals will be cheaper than closing the institutions without buyers; in any event, with its cash dwindling fast, the FDIC doesn’t have any other choice. Investors are loving it:

“From a turnaround guy’s perspective, I’ve never had this kind of downside protection,” (veteran banker Joseph) Evans says. “I don’t believe we would have either been interested or found interested investors to enter the banking industry at this moment in time, absent the FDIC assistance.”

During  the savings and loan crisis, credit was hard to come by and entrepreneurs chanted “cash is king.” But who would have thunk that the government would come to play the cash-short suppliant to vulture investors on such a massive scale?

FDIC loss-sharing has left it on the hook for more cash than it has

FDIC loss-sharing has left it on the hook for potentially more cash than it has

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3 thoughts on “Cash-short FDIC backstops vulture bank investors with guarantees

  1. Pingback: Twitter Trackbacks for Nancy Miller - The New Wall St. – Cash-short FDIC backstops vulture bank investors with guarantees - [trueslant.com] on Topsy.com

  2. Okay, this stuff is beyond me…but I hear investors are delighted…with a twenty per cent risk is it possible to pull more than twenty from the assets and call it a day…in gambling terms can they work the spread?

    • Put it this way: The assets may be troubled but they probably worth more than zero. I would say it’s also unlikely that the assets in toto are worth less than 20 cents on the dollar. In my view, this is a basically risk-free deal for the investors.

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