FDIC’s Strategy for Keeping its Head Above Water
It’s been a big week for the FDIC.
On Wednesday, the latest CFO report to the FDIC board [pdf] was released, covering the first six months of 2009. Overall, the FDIC seems to be doing a good job of shepherding their resources to manage the massive tasks they face. In their general budget, receivership expenditures for the first six months were 27% under budget (see the figures on p. 16), because:
. . . bank closings have been less costly to administer than anticipated due to the prevalence of structured and whole bank transactions for the first six months of 2009; and budgeted positions have not been filled as quickly as projected in the original Board approved budget. These factors led to lower-than-budgeted costs for asset management and liquidation, outside counsel, travel, and other expenses. [p. 10]
Good news, right? Yes, and no. It’s good news now, not because things are slowing down, but because they expect them to pick up steam and they want to be ready for it. The explanation goes on:
With the expected increase in bank failures and resolution activities during the second half of the year, Receivership Funding expenditures should increase each quarter as the number of bank closings increases and the cumulative inventory of assets under management grows. Based on that assumption, we project that all or most of the surplus budget authority in the Receivership Funding budget component will be utilized by year-end.
But go back to that first quote for a minute. The use of “structured and whole bank transactions” to deal with seized banks saved the FDIC a lot of money, because piecemeal transactions require more staff time, more lawyers, more travel, and thus more money. The FDIC knows they’ve got a huge job to do, and they seem to be figuring out how to make the most of their operating budget.
That’s the operating budget. The other, more ominous situation, is in the separate Deposit Insurance Fund. The DIF takes in fees from FDIC member banks, and invests them to use to back up deposits in the case of bank failures. The CFO report description of the DIF investment strategy for Q3 is to put just about every DIF income source “into overnight investment and/or short-term T-Bills in anticipation of using such funds for resolution activities.” (p. 15), which is the same strategy as they were employing in Q2. IOW, the DIF is keeping its head above water, but the money coming in is going right back out again.
Which leads to Friday’s activities. As was widely anticipated, Corus Bank (Chicago IL) got seized, along with Brickwell Community Bank (Woodbury MN), and Venture Bank (Lacy WA). In the press releases, however, a new wrinkle appeared. Up until now, most of the closure announcements contained a standard paragraph like this one from the Venture Bank announcement linked above:
As of July 28, 2009, Venture Bank had total assets of $970 million and total deposits of approximately $903 million. In addition to assuming all of the deposits of the failed bank, First-Citizens Bank & Trust Company agreed to purchase approximately $874 million of the assets. The FDIC will retain the remaining assets for later disposition.
In the Corus and Brickwell announcements, however, the statements read like this, with emphasis added to highlight the new wrinkle:
[Corus] As of June 30, 2009, Corus Bank had total assets of $7 billion and total deposits of approximately $7 billion. MB Financial Bank will pay the FDIC a premium of 0.2 percent to assume all of the deposits of Corus Bank. In addition to assuming all of the deposits of the failed bank, MB Financial Bank agreed to purchase approximately $3 billion of the assets, comprised mainly of cash and marketable securities. The FDIC will retain the remaining assets for later disposition. The FDIC plans to sell substantially all of the remaining assets of Corus Bank in the next 30 days in a private placement transaction. [note: the FDIC appears to have found a buyer already, but they have to wait for the ink to dry on some paperwork before that deal can go through.]
[Brickwell] As of July, 24, 2009, Brickwell Community Bank had total assets of $72 million and total deposits of approximately $63 million. CorTrust Bank will pay the FDIC a premium of 0.10 percent to assume all of the deposits of Brickwell Community Bank. In addition to assuming all of the deposits of the failed bank, CorTrust Bank agreed to purchase essentially all of the assets.
There’s no explanation given for these “premiums,” but it would appear that the FDIC is pushing to get more immediate income out of those banks that purchase failed institutions. When they assume the deposits, they also are assuming a customer base — sometimes in very desirable locations. My guess is that the banks also probably paid this premium in exchange for better terms on the loss-share agreement. That is, the purchasing banks agreed to put more money into the deal up front, but the FDIC agreed to cover more of the losses down the road. This helps the FDIC in terms of cash flow now — a very critical concern — with more of a gamble as the problem assets get unwound later.
No idea if this is a good idea or not — but it is clear that the FDIC is being creative in structuring these deals. They’re keeping one eye on the problems they have today while keeping the other eye on the problems coming next week, next month, and next year. So far this year, the FDIC has taken over 92 banks, with $99.6B in assets, $83.0B in deposits, and an estimated cost to DIF of $24.4B.
So far, so good.
But one phrase from the CFO report kept cropping up: “the expected increase in bank failures and resolution activities during the second half of the year.” As bad as the first six months were, the last six will be worse.
There was one more press release from the FDIC on Friday morning, though, that might be the most telling of all:
As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.
“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”
The FDIC can’t handle this alone, says Bair. But if banks and borrowers can work together better, it’s cheaper for both lenders and the banking system in the long run. What Bair didn’t say — and maybe didn’t have to — is that if the FDIC ends up spending more money to cover foreclosures covered in the loss-share agreements, they’re probably going to have to increase the assessments they charge banks for their deposit insurance. Banks could save themselves a lot of headaches and money by dealing with borrowers to rework the loans, rather than going through foreclosures.