With all the bank failures this year, the FDIC is a hot topic. Formerly seen as kind of a sleepy agency, lots of folks are curious about who funds it (nominally it’s the banks, but really it’s the taxpayer) and how much money it has (infinite, basically, since it’s backstopped by the taxpayer).
So the WSJ reports that the FDIC is on the hook for billions in mortgage-losses, as it’s agreed to share losses with firms that will come in and by failed banks. Of course, the FDIC has been pretty clear on this since the beginning. That’s what happened with JPMorgan (JPM) and Washington Mutual, much to the chagrin of many WaMu shareholders.
Sure it’s a subsidy to private companies, but the FDIC contends that this is cheaper than out-and-out liquidating a failed bank:
The FDIC’s premise is that banks that take on the troubled assets will work to improve their value over time. The agency estimates the loss-share deals cut will cost it $11 billion less than if the agency seized the assets and sold them at fair-market value.
“This is an issue the FDIC is grappling with because the loss rates they are estimating on these failed banks are pretty amazing,” says Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods Inc.
By potentially mitigating losses — or at least stretching them out over time — the deals provide some protection for the agency’s insurance fund. “It’s a great opportunity for banks,” says James Wigand, deputy director of the FDIC’s division of resolutions and receiverships. “It’s a great opportunity for us.”
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