FDIC Pilot Securitization Program
Did you know that the FDIC is about to start issuing securitized mortgages as an investment instrument?
Neither did I.
But thanks to Barron’s, we now know that the SEC has approved a “pilot program” for securitization. The reason for this is of course cash. So far, the FDIC has closed over 300 failed banks, draining its cash reserves. For their troubles, the FDIC now owns over $37 billion of bad-bank assets, worth, well, whatever someone else is willing to buy ‘em for. Best guess is from 10 to 50 cents on the dollar.
Hence, the new Securitization Pilot Program. According to Barron’s, the FDIC will be able “to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest.” When the program officially launches, the first issue will be a $500 million in paper. These notes are backed by loans that are bundled into agency-administered pools.
The legality of this action is confirmed by Westlaw, which notes the SEC “confirmed the registration exempt status of senior certificates issued by a mortgage trust established by the Federal Deposit Insurance Corp.’s (FDIC) pilot securitization program. The senior certificates are exempt from registration because they will be considered guaranteed by an instrumentality of the United States.”
If you want to get even more granular, then the Bank Digest has the specifics:
The SEC responded to a Federal Deposit Insurance Corp. letter seeking an interpretation of Section 3(a)(2) of the Securities Act of 1933, as it relates to the exempt status of certain senior certificates to be issued by a mortgage trust established pursuant to the FDIC’s pilot securitization program, the SEC has concurred that the senior certificates will be considered guaranteed by an instrumentality of the United States for purposes of Section 3(a)(2).
No word on whether Moody’s or S&P will be rating these . . .
>
Sources:
Uncle Sam Rides Again: Banking on a Bailout?
JACK WILLOUGHBY
Barron’s, JULY 24, 2010
http://online.barrons.com/article/SB50001424052970204078204575377281587827838.html
Federal Deposit Insurance Corporation Pilot Securitization-Guaranteed Senior Certificates
FDIC Legal Division, July 12,2010
http://www.sec.gov/divisions/corpfin/cf-noaction/2010/fdic071210-3a2-incoming.pdf
Response of the Office of Chief Counsel
Division of Corporation Finance
Securities Act of 1933 Section 3(a)(2)
July 12, 2010
http://www.sec.gov/divisions/corpfin/cf-noaction/2010/fdic071210-3a2.htm
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July 24th, 2010 at 10:35 am
“No word on whether Moody’s or S&P will be rating these . . .”
I bet ‘honest’ Ben Bernanke will be happy to load the trailer up with ‘em, at 100% of the stated value of course!
July 24th, 2010 at 10:37 am
Who’s gonna buy anything?
http://finance.yahoo.com/tech-ticker/the-u.s.-middle-class-is-being-wiped-out-here%27s-the-stats-to-prove-it-520657.html?tickers=^DJI,^GSPC,SPY,MCD,WMT,XRT,DIA
July 24th, 2010 at 11:06 am
So I don’t question their right to issue the securities, however, how is this legal?:
“they will be considered guaranteed by an instrumentality of the United States.”
July 24th, 2010 at 11:13 am
wow am I confused… how do they stamp a US Guarantee on something that’s going to trade for 10 to 50c on the dollar? Uncle Sam is going to guarantee return of principal and interest on toxic MBS that some investor buys for 20c on the dollar? that makes no sense at all to me.
anyone? anyone? Beuller?
how about this quote in the Barron’s article from William Black:
“”They aren’t really selling the bad assets. They’re selling the equivalent of a Treasury bond without congressional approval,” says William Black, a former thrift regulator. “It hides the economic substance of what’s really happening—an unlimited taxpayer bailout.” ”
but are they selling these pseudo treasury bonds at 10c – 50c on the dollar??? huh? or is the entire point that slapping the guarantee on them means the price will trade much much higher, like a T-bond, even though they’re only WORTH up to 50c on the dollar – and the Government will be the one making investors whole? a backdoor FDIC bailout! ah hah.. now I get it… absurd. sick. am i wrong here?
July 24th, 2010 at 11:46 am
First they took over the numbers racket with lotteries then….
July 24th, 2010 at 11:48 am
Robespierre:
Probably the same way the Federal Reserve note is legal — that is to say, it’s not (under the Constitution, anyway).
July 24th, 2010 at 11:48 am
I think we’d be better off just selling them for 10-50 cents on the dollar to be done with them. Why retain risk when there’s every indication that both commercial and residential real estate will get worse before they get better.
July 24th, 2010 at 11:49 am
barry – how are you not angrier about this? i just wrote this post: http://bit.ly/bU6EJT
July 24th, 2010 at 12:02 pm
The FDIC needs the liquidity. It recently collected three (future) years of prepaid assesssments and is quickly running through it.
Not sure how much more FDIC will own to sell. Almost all closings contain loss sharing agreements wherein FDIC covers 80% or 95% of assuming (purchase and assumption agreements – nearly all deals) of losses going over 5 years for C&I loans and 10 years for mortgages. And, it seems the FDIC loss sharing covers the entire unpaid loan balance at closing date, even where the assuming bank may have paid a $.50 discount for the loan.
Unlimited taxpayer bailout” Point of Information: In a bank failure FDI insurance losses are incurred by all the insured banks. (I think FinReg gave the FDIC a large UST credit line.) The FDIC charges banks assessments. The FinReg legislation improves the funding source. One: the assessment will be calculated on TA less tangible NW, formerly it was total deposits; Two, there is no longer a ceiling on the FDI fund balance ratio to deposits.
Oh! I forgot. That’s corporate welfare! Banks deduct FDI expense for federal income taxes.
Yo, Stalin, thanks for not posting my comments. This way you and your readers will remain ignorant of the difference between shit and shinola.
Rasmussen poll: “75% of Likely Voters prefer free markets over a government managed economy. Just 14% think a government managed economy is better while 11% are not sure.”
July 24th, 2010 at 12:04 pm
Mike in Nola Says:
“I think we’d be better off just selling them for 10-50 cents on the dollar to be done with them. Why retain risk when there’s every indication that both commercial and residential real estate will get worse before they get better.”
Yes we the taxpayers would be better off. However, they the bankers would not. Ergo….
July 24th, 2010 at 12:09 pm
Well, is it any surprise that the FDIC, basically a shadow bank backed by the full faith and credit of the US government, will use every trick up its sleeve to pretend its insolvency is not as bad as it seems? Like Black notes, it is not a ‘sale’ of anything when you provide the financing and guarantee its repayment. These are the type ‘sales’ that have chief financial officers of public corporations doing the perp walk.
Alas, the FDIC is at present, even by its own accounting, $20 billion in the red. It insures roughly $5.5 trillion in deposits. These liabilities have as their backing any manner of risky and overvalued assets being carried on bank balance sheets today. The FDIC is to the banking industry what the GSE’s are to the residential mortgage industry. If the assets collateralizing the FDIC’s liabilities decline by about the same as the assets collateralizing the GSE’s liabilities are expected to decline, we may be looking at losses in each in excess of a trillion dollars (a 20% decline). And be not confused. The FDIC, just like the GSE’s, have the backing of the federal government. The losses will flow straight through to the balance sheet of the taxpayers.
July 24th, 2010 at 12:37 pm
@Kid: I’m guessing Barry is like my Dad – the angrier he gets, the quieter he gets. If that’s true, BR is very, very angry.
BTW, the FDIC has to do this. They have increased deposit insurance rates on all banks, including the solvent ones, to the point that they can’t increase them anymore without risking total collapse of the banking system. A real collapse this time, not just of the TBTF banks. This theory of mine is based on what has happened with my credit union. I don’t have any money in banks any more.
July 24th, 2010 at 1:13 pm
what, they’ve run out of ex-Goldman bankers/PE execs to get sweetheart deals to?
They are REALLY desperate to get some cash, but also have to make sure that the dumb Joe Taxpayer does not realize that another bailout is happening via gov’t guarantees of whatever paper they sell.
I have a better solution: stuff this garbage paper down the existing FDIC member’s throats, or raise the premiums on the member banks!
July 24th, 2010 at 1:26 pm
Sorry, completely off topic, but could someone please alert Nicholas Taleb to the amazing LonGisland tapestry featured in today’s NYTimes Real Estate section? It’s so up his alley:
http://www.nytimes.com/interactive/2010/07/25/realestate/20100725-otmregion.html#8
July 24th, 2010 at 1:30 pm
One can always count on creative ways for politicians to push problems off into the future.
July 24th, 2010 at 1:49 pm
Bullish for pure vanilla USTs as has been the case for years since the FED has crowded US Savers of real money as stored work value, the only real trade stuff, with ZIRP.
ZIRP (Uncle Ben’s solution) will make the USD a carry-trade currency like the Yen, and we’ll be waiting on line to be paid in GM cars!
(Dream Sequence)
We will ask our representatives to write a paragraph about where they were on every issue that came to vote during their term of office. It will be on-line for their editing pleasure with changes archived. They owe you the facts of what they did in simple English, and we will see 90% of our incumbents pounding salt on November 3rd.
July 24th, 2010 at 2:20 pm
this Post: http://www.ritholtz.com/blog/2010/07/apple-religious-experience/
should have used the FDIC, instead of AAPL
~~
“what, they’ve run out of ex-Goldman bankers/PE execs to get sweetheart deals to?”
bthunder, Good Q: , but, remember, We’re not supposed to talk about that..
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=FDIC+Sweetheart+Deals+Indymac+OneWest
July 24th, 2010 at 2:47 pm
That makes sense. They are in the red and “we the people” are already on the hook for that money (unless their fees soon catch up – and what is the chance of that). So they get liquidity by issuing papers backed by the full faith of government (borrow rather than ask for the cash) – we are already on the hook for that money so what is wrong with that. They use their sh!t assets as collateral but because of the government backing they can sell it at 100 c on the dollar rather than the 10-50 cent without government backing. Eventually the loans have to be payed back but that will be done by the banks fees to FDIC. If they cash out the loses now then “we the people” would have to cover it. I am all for FDIC borrowing by whatever mechanism rather than going to US government to cover their deficit.
July 24th, 2010 at 2:51 pm
package these assets up in to a CDO, get AAA rating and sell to the I-Banks; add in a bit of CDS, step and repeat to create CDO squared and push them out …. oh, wait that’s what GS did — ummm it’s a bummer when you are holding the bag when the music stops.
Since J. Paulson has now become a housing bull, perhaps FDIC should package these up and sell them to him … oh he doesn’t buy real things, he would look to GS to create some structured product so he could risk a few million to have the right to profit on the upside….
July 24th, 2010 at 3:04 pm
@dedude – 1) the banks should be the ones paying to fund the FDIC, not We The People. 2) the FDIC is not issuing FDIC debt here – i think that’s what you sounded like you were saying – they are selling securitized debt made up of assets that they’ve taken over from other banks. it’s different. the former would just be a ponzi scheme of using a Gov’t guarantee that would hopefully, by its very existence, eliminate the possibility of FDIC insolvency – since ample guaranteed debt could be sold. What’s happening here, however, (PREPOSTEROUSLY, in my opinion) is that the gov’t is guaranteeing these securitized products even though the underlyings are worth 10-50c on the dollar.
July 24th, 2010 at 6:59 pm
@KidDynamite:
Considering that “we the people” that have bank accounts will be charged the insurance premiums that the banks are charged–by costs, fees, etc. (and by the way, the FDIC insurance fund has a negative balance of $20 billion, even after having the banks prepay their premiums up to 2012), there is not a lot of difference with the banks or “we the people” paying the premiums. BUT. The insured liability reaches now to $250,000 per account. Regular joe taxpayer/bank customer has what, maybe $5,000-$10,000 in checking and savings and CD accounts? It’s the accounts that bump up against the $250,000 that get the most benefit from the insurance, but that’s not the way the costs are/will be parceled out by the banks. They’ll charge all their customers a little bit, instead of charging per dollar of insurance. Thus the insurance fund will basically operate as a regressive tax policy, taking money equally from all, and funneling most of it to the rich.
July 24th, 2010 at 7:56 pm
The last trader to leave Wall Street, please turn off the lights.
Probably the best thing to do, the government now owns or controls it all anyway. Let see how long before the government begs Wall Street to come back.
July 24th, 2010 at 8:04 pm
It seems to me the government always gets things backwards– looks the other way when Wall Street is making money(more tax revenue) and then steps on everyone when things get a little bit stickied up.
I don’t get it other than political activists want a piece of the action, more than just collecting taxes, Wall Street gets it in the (_x_) again.
July 25th, 2010 at 1:52 am
[...] Ritholtz has another story about an FDIC pilot program; Bloomberg supply a few more [...]
July 25th, 2010 at 2:00 am
“No word on whether Moody’s or S&P will be rating these . . .”
Fork over the Benjamins and they’ll rate a three dollar bill a AAA. And let’s not forget about the good ‘ole boys over at Fitch.
July 26th, 2010 at 8:21 am
sound perfectly fine to me
just like the trillions fannie and freddie have done
how can that be illegal?
handing out insurance later taxpayers will cover is the mothers milk of US polititcs
July 26th, 2010 at 12:04 pm
FDIC now has a new meaning:
“Federal Deposit Incarnation of Countrywide”.