While the Federal Deposit Insurance Corp. successfully securitized failed-bank assets last week, helping it to off-load the detritus of recent collapses, it remains unclear whether the deal will accomplish another policy goal: helping reboot the private securitization market.
The FDIC announced late Friday that it had sold to private investors about $400 million of mortgage-backed securities, created from the loans of 16 failed banks. The investments are guaranteed by the agency.
Though observers agreed that the deal gives the agency another way to reduce losses of federal reserves, they questioned whether the FDIC's model can be used by other issuers.
"I see this as having virtually no impact on the private market, and its being primarily another way for the FDIC to dispose of assets that it has acquired from the various bank failures," said James Rockett, who is co-chairman of the financial institutions corporate and regulatory group at Bingham McCutchen LLP.
The securitization, anticipated for months, had a two-pronged purpose. In addition to asset disposal, FDIC officials said they wanted to give private securitizers a "best practices" model for returning to the market. It wanted to prove that private investors could be comfortable with proposed restrictions from the agency that were designed to ensure securitizations would not be structured as they were before the financial crisis. Michael Krimminger, deputy to the FDIC chairman for policy, said the deal announced Friday was a step toward that goal.
"We hope, first and foremost, the transaction will be a cost-effective way of maximizing our recoveries from failed-bank assets," Krimminger said. "We do also hope that the transaction can serve as an example to banks and anyone else interested in engaging … in the securitization market in the ways to structure deals, as well as to jump-start that marketplace."
Securitization of failed-bank assets was last done by the Resolution Trust Corp. during the savings and loan crisis.
The deal announced by the FDIC is one of a host of methods it has pursued during the current turmoil to offset costs to the Deposit Insurance Fund, including loss-sharing agreements, shared-equity deals and sales of bonds backed by failed-bank assets that the agency retained.
Observers said the transaction lets in a new field of buyers for failed-bank assets — those not interested in whole loans but just pieces of them. "There are some investors — pension plans, trusts, maybe insurance companies — that are allowed to invest in securities but not in loans," said Kip Weissman, a partner at Luse Gorman. "These are government-backed securities. They're very clean. The investor class is far broader."
But observers were skeptical that private issuers would see a model in the FDIC deal, which was able to attract investors with a government guarantee and lacked the profit-and-loss concerns that a private bank has. "Banks … have valuation issues that they need to confront, whereas the FDIC can basically let the market tell them what they're going to get, and it's going to be a number probably south of what a bank can realistically expect to get," Rockett said.
Tom Deutsch, the executive director of the American Securitization Forum, said the agency's deal is quite different from what private securitizers try to accomplish. "There are some pretty significant distinctions between the FDIC's packaging of receivables of mortgage loans and private-label mortgage-backed securities," Deutsch said. "The key is that private-label RMBS generate new capital for lending to consumers. The FDIC's program is really just focused on unloading seasoned existing assets, obviously for the purposes of recovering those funds for the FDIC."
Krimminger acknowledged that the agency is in a "different situation" than an open bank, but he said the transaction proved another point: that securitizations with restrictions proposed by the FDIC are still attractive to investors. The agency has proposed conditions for protecting privately securitized assets from FDIC seizures. "We do hope it will be a standard that will be used by others," he said.