Banking Law

The FDIC's practice of "loss sharing" with acquirers of "bad assets" of failed banks and thrifts reached another level with the recent sale of a mixed bag of loans from the failed Franklin Savings of Austin (30% of which are nonperforming) in a "test" of the PPIP. The FDIC provided sweet, government-backed cheap purchase money financing, and owns 50% of the underlying "vehicle" being used to hold the loans. The other 50% was sold to a Texas-based (where else?) outfit formed by subprime mortgage veterans. Unlike the RTC, which sold the assets of failed thrifts at then-current depressed prices and walked away (which, by the way, was its legislative-directed mandate), the FDIC seems determined to share in the "upside" as the loans are "worked out" and paid off over time (or otherwise increase in value as the economy recovers and are sold). That's the theory at least.

A couple of weeks ago, Matt Stichnoth at Seeking Alpha noted the irony in this desire to ride the upside train.

Good heavens. Sheila Bair has actually stumbled onto a sensible policy. She somehow understands that ?fair-market value? might materially understate the NPV of cash flows the assets will eventually generate, and that it can make more sense to manage those assets over the long-term. I await the FDIC?s jihad against mark-to-market accounting. . . .

Matt then points out an inconvenient truth. Just a few months ago, Ms. Bair took a contrary position when discussing what commercial banks ought to do with such assets.

From the Washington Post this past June:

But FDIC Chairman Sheila C. Bair said yesterday that the best course for banks, and for the broader economy, remained a combination of raising new capital and shedding old problems. . . .

"It is preferable to get them to sell assets in combination with raising capital in order to get the banks to be in a better position to start lending again," Bair said in an interview. "Getting them off the books is a cleaner posture for the banks."

It?s too much to expect she realizes she?s endorsing two policies that are diametrically opposite one another, I suppose. . .

Yes, I suppose it is. As we've noted previously, as far as Ms. Bair's concerned, only borrowers (and, apparently, the FDIC) are entitled to forbearance. Commercial banks are entitled to bupkis. They have to liquidate at current depressed prices, raise more capital (and pay another round or two of special assessments to save the FDIC), and pray for manna to rain down from Heaven.