10.05.2010
01.11.2012 updated broken link
FDIC Bank Loss Sharing Program (Update)
original article written by Net Advisor™
A report published by the GAO stated that the U.S. Treasury approved bailouts for 66 weaker banks who had prior known problems (Source: Washington Post).
If one has been following our Bank Failure Tracker over the last two years, the data suggests that government has helped a lot more than 66 banks; in fact upwards of 129+ banks have been helped just in 2010 alone. This is called the “loss sharing agreement” (Prior Loss Sharing program early mid 1990’s – Official FDIC PFD File, 18 pps) (More recent FDIC official video below).
Key Point to Loss Sharing
When a failed bank occurs, the FDIC has to find another bank willing to take on the good and mostly bad assets of the failed bank. The FDIC then makes concessions to guarantee that the acquiring bank doesn’t loose (hardly any) money on bad loans from the failed bank. Thus, in the event those loans go bad, the FDIC has covered in most cases so far, about 80-95% of the bad debt.
Now, if you took over a failed business (call it a bank), and some government agency said, ‘hey, if you take over this failed (bank) business, we will enter into a loss sharing agreement. We (the government, FDIC, Treasury, tax payer) will guarantee that you can’t lose more than 5 to 20 cents on the dollar, thus we (the bailout agency) will absorb 80-95% of losses and risks.’ Anyone who would not want to own a bank and have the government guarantee that 80-95% of your business could not lose money?
“Through May 2010, the FDIC has entered into 161 loss sharing agreements, with $173.5 billion in assets under loss sharing. The estimated savings exceed $35.6 billion, compared to an outright cash sale of those assets.”
— Source: FDIC
Try not to get sidetracked by the music, sweet voice, and marketing aspects of the FDIC video. No matter how you slice this, it’s a bailout. Here is the FDIC official video:
Where Is This Bailout Money Coming From?
The source of funds may not necessarily have come directly from TARP or the Treasury, but may have, and in many of not most cases come from the FDIC. Either way, its bailout money for failed banks. The money ultimately can be traced back to taxpayers.
The FDIC might argue that their source of (bailout) funds comes from the FDIC insurance fund, and that money is paid for by fees by contributing member banks. We’ll, the only problem with that argument is most FDIC charter banks are not non-profit organizations. The banks profit comes from, guess who? The consumer in the form of profits on interest charged on car loans, home loans, credit cards, bank fees, service charges, late fees, refinancing fees, miscellaneous fees no one understands but has to pay, and revenue on other investments with depositor’s money.
Do All the FDIC Bailouts Go to the Highest Bidder?
We don’t know about every case, but we found in once particular case the highest bidder did not win the FDIC auction.
A 2009 study by Kimble Cannon, Dhiya El-Saden and Chris Bellini of the law firm, Eduardo Gallardo, Gibson, Dunn & Crutcher LLP was posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation tells a different story. This case involved the auction of failed, BankUnited Financial Corp (Fail Date: 05-21-2009, FDIC Cert# 32247, Location: Coral Gables, FL), where according to the report, “arguably (the) “highest” economic bid did not guarantee success before the FDIC” (Source: Harvard Law School Forum).
We also reported on July 16, 2009 citing a Wall Street Journal article stating that the FDIC sought to get a $500 Billion credit line from Congress. It should be noted that Congress gets their money from — the U.S. tax payer, thus who is really paying for the bailouts?
On October 1, 2010, we further noted that despite the Obama Administration’s repeated claims and assurances that there are or will be no more bank bailouts, the reality is they continue with or without TARP. It’s just another bailout program under another branch of government.
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Related stories:
View the GAO Report on TARP (PDF, 59 pps), October 2010
Toxic Asset Sales, Finally: FDIC Keeps on Giving, (External Link), 04-29-2010
See the other bank failures and history on our Bank Failure Tracker
(Chart Data Source: FDIC)
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