This is unreal.
My speakers aren’t too good, but what I could hear was typical. I have observed, then researched several FDIC takeovers, and there are only two ways they end up. Either the FDIC puts a lot of sweetener (profit guarantees) into the deal or no bank will take over a failed bank. If there are no takers, it costs the treasury even more than these sweetheart deals.
I might add that there is even more sweetener to them than I was able to hear. Typically, failing banks have trouble raising cash before they go down. So they resort to brokered accounts that have high rates. The FDIC also takes those and pays them off. The bank that takes over a failed bank then ends up with only “retail” accounts; the ones that pay pretty low rates and are fairly stable. The FDIC also takes away all the unsecured bad loans and whatever real estate, locations or leases the acquiring bank doesn’t want.
It does seem outrageous when you look at it. But the truth is the FDIC can’t find takers without doing that. No solvent bank will take over a bunch of bad assets that might drag them down too. They just won’t.
Strange as it may seem, it really is the cheapest way out for the government. It might be added, though, that some of the acquiring banks have very good “workout teams” that can maximize what gets recovered on troubled loans. The government doesnt. When the government can’t find a buyer, it “fire sales” the bad loans and foreclosed real estate. It just doesn’t have sufficient, talented people to do any better.
Apparently, the alternative would be for the FDIC to simply close the bank, pay off depositors up to the limit of the FDIC insurance, and sell off the assets–including underwater loans–for whatever the market would bear–i.e. at a big loss. Of course, the FDIC’s loss is always the taxpayers’ loss.
Yes. And TARP 1(b) was designed to give healthy banks enough equity reserves (TARP is booked as “equity”) to embolden them to do the takeovers at all. A good idea, though a lot of it was used to bail out the “too big to fails”.
I have talked to bankers who received calls from the Fed back when TARP was first instituted. They were arm-twisted into taking it, which also put them on the “call list” of banks to call to take over a failing institution. Without all of that, there would have been few, if any, takers.
So, in a way, what the FDIC is doing is “hiring” the healthy banks’ “work out teams”, so the losses aren’t as great for FDIC as they otherwise would have been. The government doesn’t have teams like that. Most good banks do.
I found this article interesting…
What do you all think?