FDIC hopes that the oldies are still golden

Even if the rating agencies have retired hurt, it does seem that there is one organization still prepared to issue guarantees on, say, Option-ARM backed structured finance. Step forward, the collective of good old American taxpayers!

One of my friendly emailers had a complete conniption about an FDIC program, during the week, and I never got time to follow it up:

The FDIC program is obscene.  It is deliberately anti-democratic…Because it is a specialized bond product issued by an insolvent entity (the FDIC), the FDIC will have to pay a yield premium (relative to straight Treasury bonds) despite the FDIC bond’s full faith and credit backing.  That spread over Treasuries represents pure waste that will add unnecessarily to the ultimate cost to the taxpayers.

I thought he was having some sort of strange flashback at first, because, actually, it sounded like quite an old plan. But nothing ever happened with that; after a while, it started to look like another one of those useless M-LEC type ideas that got touted around at the height of the crisis; so, eventually, I assumed it had been quietly dropped.

But no, it’s baaack. FDIC have actually started issuing this stuff already; they are stuffed to the gunnels with the toxic legacy of all those takeovers of failed banks, and pretty much out of cash to cope with more banks.

Apparently, ditching the pig at market prices isn’t as good an idea as putting a load of structured-finance lipstick on it. I think this has all been tried before, Ms Bair; it went badly.

Now Ritholtz has another story about an FDIC pilot program; Bloomberg supply a few more details.

Reading across from that March program, it looks like they will have two tranches, overcollateralization, and a guarantor (“an instrumentality of the United States”: that would be you, in the end, if you are a US taxpayer). Since the pilot program securities are issued under Rule 144a, they’ll even be able to have a rating, for what that’s worth.

Oh, and FDIC retains the equity tranche. Not sure what the point of creating one is, then. Perhaps they plan on shorting the seniors and resuscitating the Magnetar trade; they might as well go the whole hog with this trip down memory lane.

Deja vu all over again. I hope the guarantors do better out of it this time, though, and I bet you do, too.

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  1. attempter

    This is typical of Bailout America. Everything this criminal government does has one goal, and that’s to continue the Bailout, which by now must be seen as an ongoing counter-revolution from above.

    The e-mailer is correct, not only is this particular program, just like every other aspect of the bailout, “deliberately anti-democratic”, but part of the goal of the Bailout is the final destruction of what little democracy we have left.

    To sum up, the proximate goals of the Bailout are

    1. to maximize personal looting by bank cadres (“bonuses”),

    2. to prop up the fraudulent balance sheets of these banks which are all insolvent.

    Then the broader, longer-term goals are

    3. the complete subversion of democracy, to facilitate

    4. the full development and “rationalization” of a corporate looting economy, a command economy where Wall Street, the universal spider, coordinates at the center and everything else ramifies out, with the federal government serving as bagman and thug.

    And of course the Bailout is also the jump-off point for the more direct “austerity” assault, and eventually the full restoration of medieval feudalism.

    So if the American people are to redeem democracy and freedom itself, we need to jubilate the debt, smash the banks, and restitute the farmland.

  2. Mindrayge

    And for the assets outside of the program you are writing about one can see just what kind of quality assets the FDIC is unloading

    From the AM Trust mess – $898 million / 96% of loans delinquent


    The FDIC as Receiver for the failed bank will convey to the LLC a portfolio of approximately $898 million residential real estate loans, of which approximately 96 percent are delinquent. Thirty-seven percent of the collateral in the portfolio is located in Florida, 11 percent in California, 5 percent in each of Arizona, Nevada and Massachusetts, and the balance in 42 other states.

    As an equity participant, the FDIC will retain a 60 percent stake in the LLC and share in the returns on the assets. The FDIC offered 1:1 leverage financing and has agreed to guaranty Purchase Money Notes issued by the LLC in the original principal amount of approximately $169.5 million.

    And, of course, more wood for the HAMP bonfire …

    As the managing member of the LLC’s managing equity owner, Residential Credit Solutions, Inc. will provide for the management, servicing and ultimate disposition of the LLC’s assets. RCS will apply the HAMP loan modification protocol to eligible loans in the portfolio.

    1. Kid Dynamite

      “of which approximately 96 percent are delinquent”

      aiyahhh!!!! fear not, though, there’s nothing to see here, nothing to worry about – after all, it’s GUARANTEED! (sarcasm!)

    2. Bates


      “96 percent are delinquent. Thirty-seven percent of the collateral in the portfolio is located in Florida”

      Anecdotal information… I live in a medium size town in Florida. There are NO safety deposit boxes for rent at any of the many banks and credit unions in my town. If you inquire about getting on a waiting list for a box the response is ‘I wouldn’t bother, none have become available for years’…

  3. Kid Dynamite

    Richard – I had a pretty different read of this than your “friendly emailer” did, but i’m equally furious. i think you might enjoy the post I wrote on the subject (you can find it on my blog, i won’t link it here, out of respect). the “waste” comes from the fact that the government is rubber stamping assets which we already know to be worth 10c to 50c on the dollar, which induces buyers to overpay for them (money that goes to the FDIC). additionally, this isn’t a case of “as long as we can keep selling more debt we won’t have to actually make good on the guarantee since we won’t default” – these are asset backed securities where defaults are almost certain. Of course, the FDIC thinks they’ve solved this problem with their CDO-esque seniority structure – which is LUDICROUS. as you said, “I think this has all been tried before, Ms Bair; it went badly.” That wasn’t 50 years ago. it wasn’t even 10 years ago. it just happened! how do people forget so quickly?

    basically, the whole thing is a way for the government to re-fund the FDIC, which is something that the BANKS should be doing – not the taxpayers. sick. side read through: i think this is more proof that the banks are viciously insolvent and canNOT fund the FDIC themselves, despite all the bs we’ve been fed about how they are doing fine blah blah blah etc etc etc.

    1. traderjoe

      It is amazing to me – and quite sad – how much money is OPENLY being funneled from the taxpayers to the banks. It is the great robbing of the country to a select group of people that clearly played a huge part of the creation of the problem. AND that all of this happening openly and with relative transparency. Stealing in broad daylight.

      The EU stress tests were for me a “jumping of the shark” in the credibility of the FinMins, bankers, politicians, MSM, etc. – especially as GE boosted its dividend “20%” (2 cents, still 60% from pre-crisis levels) 15 minutes after the stress test results clearly in order to create a diversion in the MSM (CNBC spent the day talking about the clear corporate confidence it showed).

      We are witnessing the great spasm of “capitalism” into a – well it’s not capitalism anymore. If it weren’t real, with real ramifications, it would be comical. This farce will not end well.

  4. doc holiday

    This kinda looks like a covered bond, kinda like the one that WaMu had….

    WaMu covered bonds rally, pass key investor test (Sep 26, 2008)

    overed bonds issued by Washington Mutual Inc jumped on Friday after U.S. regulators affirmed the supporting assets would be assumed by JPMorgan Chase & Co, easing investor doubts of how the securities may be treated in a bank insolvency.

    Yield spread premiums on WaMu (WM.N) covered bonds narrowed as much as 500 basis points to 100 to 300 basis points above the six-month Euribor benchmark, a dealer said, noting thin volume.

    The Federal Deposit Insurance Corp, after inquiries from dealers, told investors that covered bond assets would be included in the WaMu debt acquired by JPMorgan (JPM.N) after the troubled Seattle-based savings and loan institution was shuttered by regulators.

    >> It’s “positive for the formation of a U.S. covered bond market,” Michelle Bradley, an analyst at Morgan Stanley, said in a client note. “The treatment of WaMu covered bonds should be a huge source of confidence for U.S. investors” who are not as familiar with the market as European buyers, she said.

    The strength of the bank backing the cover pool will still factor into the price of the bond, however.

    According to Fitch Ratings, assets covering WaMu bonds as of July were about 20 percent payment-option adjustable-rate loans, products especially prone to foreclosure as they allow balances to rise as home values fall.

    Fitch Ratings upgraded its ratings on WaMu’s covered bond program to “AA-minus” from “BBB-plus,” and placed the outlook on “rating watch positive.

    ==> They left out the part about: http://en.wikipedia.org/wiki/Crocodile_tears

    Crocodile tears are a false or insincere display of emotion such as a hypocrite crying fake tears of grief. The expression comes from an ancient anecdote that crocodiles weep in order to lure their prey, or that they cry for the victims they are eating. This tale was first spread widely in the stories of the travels of Sir John Mandeville in the 14th centur

  5. Andy

    These are assets that the FDIC received from failed banks. What else should it do with them? It could…
    * Service them itself, which is expensive and a drain on agency resources.
    * Sell them as whole loans — it is am empirical question whether they will get better pricing on the whole loan market or securitization, but the law says that they have to maximize their return, or
    * Put them into a loss-sharing agreement with a bank — pretty similar, actually, except that the banks can only absorb so much, this helps bring other types of investors into the system.

    Really you are overreacting to the dirty word “securitization”… the FDIC is not speculating, they already own this junk and are trying to offload it in the most efficient way. Let’s see something a bit more reasoned from the normally good nakedcapitalism.com.

    PS the RTC did this in spades in the early 1990s and it was quite successful.

    1. Kid Dynamite

      andy – the FDIC should sell off the assets. the point is that the government should have nothing to do with it. the government guarantee is a direct subsidy to the FDIC (and thus, to the banks, who are the ones who are supposed to fund the FDIC) by the taxpayers. it will induce the buyers of the securitized products to overpay – money that will go to the FDIC, and will eventually be reimbursed by the government, who is providing the guarantee.

    2. doc holiday

      “Really you are overreacting to the dirty word “securitization””

      I’m reacting to the bullshit related to WaMu’s covered bonds which were bogus pieces of shit that were rated as if they were not dogshit, when they were first issued — then, after FDIC re-rated this re-securitized dogshit, the old dogshit is rolled into a new pile that smells more like fraud, collusion, conspiracy to defraud and other shit that smells like pure shit.

    3. Mindrayge

      With the RTC “full faith and credit of the United States” was not used and that is the key difference.


      Page 409 in the PDF shows:

      The RTC’s Oversight Board did not support the RTC’s issuance of securities backed
      by a full government guarantee. That lack of support stemmed partly from concerns
      raised by the Department of the Treasury that (1) the government would retain all of the
      risk because there was no real asset sale, and (2) issuing a new security with a full faith
      and credit guarantee by the U.S. government would compete with the securities issued
      by the Treasury. As a result, the RTC did not use a government guarantee to enhance the
      credit of RTC securities. Instead, the RTC decided to use cash reserves and other methods
      to provide credit support. It issued publicly rated mortgage-backed securities for
      which the senior securities were rated in the two highest rating categories by at least two
      national credit rating agencies.

      Both of the arguments raised by Treasury in the case of RTC securitizations are equally valid today.

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