Reply #55: US eyes bond issues to offload bank assets (FDIC TOXIC TRASH) [View All]

[Demeter]

http://www.ft.com/cms/s/0/e139b872-0939-11df-ba88-00144feabdc0.html

The US Federal Deposit Insurance Corporation is working on plans to package billions of dollars of assets from failed banks into securities, a move that will help restart the still dysfunctional markets for mortgage-backed bonds.

If the FDIC goes through with the bond issues it would mark a milestone in government efforts to rid the banking system of troubled assets. The FDIC has more than $36bn in assets on its books from failed institutions seized during the financial crisis.

People involved in discussions said the plan to use the troubled assets to back securities – “securitisation” – is at a preliminary stage. A final decision, which could come in weeks, will depend on finding a structure to provide a sufficient return to the deposit insurance fund.

“The FDIC is going to be a big issuer in the securitisation markets this year,” said Christopher Whalen, managing director of Institutional Risk Analytics. “This could lead the way in terms of recreating the securitisation market, as the FDIC deals could end up being the new template.”

The FDIC plan is similar to a strategy used in the US savings and loan crisis by the Resolution Trust Corporation, the state-owned asset management company charged with liquidating assets from insolvent lenders in the 1980s. “The FDIC is dusting off the playbook of the RTC,” said one person involved.

The FDIC – created by the US government to guarantee deposits after a wave of bank failures during the Great Depression – declined to comment.

However, the regulator, under its chairman Sheila Bair, has been keen to expand its role in stabilising the US financial system. This has included pushing banks to adhere to stricter rules and underwriting standards when they use mortgages and other loans to back securities.

The market for such securitised assets was once a source of hundreds of billions of dollars a year of financing for banks and companies, but has been largely closed for private mortgage finance since investors lost billions of dollars on mortgage- related debts in the crisis. The US mortgage market is mainly financed through US government-backed entities, such as Fannie Mae and Freddie Mac.

One option being considered by the FDIC is selling bonds with a US government guarantee in order to ensure they have triple A credit ratings.

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