Another Private Equity Pig Fest to buy Failed Banks

The FDIC released new rules, of course on Friday when no one was watching. HuffPo:

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."

FDIC Sets Private Equity Investment Rules

Yesterday, FDIC adopted weaker rules than initially proposed (Here is the story on the initial proposal and Here is the FDIC's Final Statement(pdf)). FDIC decided to lower the required Tier 1 Capital Ratio from 15 to 10. It is still higher than industry norms.

FDIC probably didn't have much of a choice with prediction of 150-500 banks in trouble and Distressed Insurance Fund in trouble. I guess one good sign is that the private equity firms are still not happy. They are whining that the final rule will lower bids for failed banks. Oh, yeah, the sky is falling.

Private Equity Firms to the Rescue?

On July 9, 2009, FDIC issued a notice of proposed Statement of Policy. The public comment period ends August 10, 2009 (go to http://www.FDIC.gov/regulations/laws/federal/notices.html if you want to file a public comment). The private equity firms have submitted their comments and obviously they don't like the FDIC proposal.

Our banking system is in dire need of new capital. Consider this: FDIC is forecasting as many as 500 bank failures in the near future. Pretty bad situation.

FDIC Chairman: 500 bank failures to come

We've seen 69 bank failures so far this year. That's nothing compared to what we are going to see in the coming months.

FDIC Chairman Sheila Bair is predicting that the bank failure rate will increase tenfold, according to a U.S. Senator.

Bair said up to 500 more banks could fail, Sen. Jim Bunning, R-Ky, said in a meeting, reported Dow Jones Newswires.

That would put the current crisis close to the level achieved during the late-1980s savings and loan crisis, when 745 thrifts were shut.

The Battle of the Regulators

Regulators are in a power struggle as new policy proposals as well as Congress mull regulation reform of the financial system.

John C. Dugan, the comptroller of the currency, blasted a proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates. The financial crisis stemmed in part from problems at small banks, he insisted.

Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation and the regulator for many smaller, community banks, could barely hide her contempt. The large banks, she said, had wreaked havoc on the system, only to be bailed out by “hundreds of billions, if not trillions, in government assistance.” She added, “Fairness is always an issue.”

Bank Failure Friday Comes on Thursday - BankUnited - Failure 34 for '09

Usually we get these announcements right after business close on Friday. But today the FDIC announced:

BankUnited, a newly chartered federal savings bank, acquired the banking operations, including all of the nonbrokered deposits, of BankUnited, FSB, Coral Gables, Florida, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). As a result of this transaction, BankUnited, FSB, offices and branches will be operated as BankUnited offices and branches.

BankUnited's 86 offices will be open tomorrow during normal business hours. BankUnited, the successor institution, will be the largest independent bank in Florida, as was its predecessor (BankUnited, FSB). The management team is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank.

FDIC's New Role: Snake Oil Salesman

Actually, snake oil may have some medicinal qualities to it but those who did peddle snake oil used shady and misleading sales tactics - interestingly very similar to AIG. The thought of snake oil salesman quickly came to mind after reading this NYT article: ‘No-Risk’ Insurance at F.D.I.C. . One would think that we would have learned by now that there is no such thing as "risk free" in our current market situation. So why is the Sheila Bair, Chairperson of the FDIC (Federal Deposit Insurance Corporation) trying to sell us on the idea that any guarantees or insurance that FDIC is issuing that relates to the bailout plan are "risk free"?

FDIC's Mission:

FDIC Commitments 34% Higher than Published Data

Over on optionarmageddom.com they analyzed the FDIC new insurance commitments:

I looked at FDIC’s 12/31/08 balance sheet. Note at the bottom of that link the estimate for total insured deposits: from Q3 to Q4 it increased only a smidge, to $4.8 trillion from $4.6 trillion.

Odd, no? Why such a small increase even though FDIC dialed up deposit insurance limits so significantly during Q4? FDIC Senior Banking Analyst Ross Waldrop told me during an interview last week that it’s because so-called “temporary” increases in deposit insurance are excluded. If included, these would boost total insured deposits from $4.8 trillion to $6.2 trillion.

FDIC’s total commitments would increase an additional $224 billion to $6.4 trillion if you include debt issued prior to the new year under FDIC’s “Temporary” Liquidity Guarantee Program.*

FDIC Inviting Public Comment on Legacy Loan Program

FDIC is accepting public comments on its Legacy Loan Program. The program that provides even more leverage in our financial system in the form of subsidies to private investors so that private investors will purchase toxic loans from banks (especially zombie banks). Look at what the FDIC is considering:

The FDIC may allow the sellers of a loan to get an equity interest in the vehicle that buys it, meaning they would gain from any future increase in the asset’s value. The aim is to give healthier banks an incentive to sell loans at a cheaper price, encouraging more investors to make bids.