Sheila Bair: FDIC Sell Toxic Assets? Forget It

Sheila Bair suddenly sees the wisdom of banks working their troubled assets rather than selling them into an inhospitable market:

The FDIC contends it would cost the agency considerably more to simply liquidate the assets of failed banks, especially with the current crop of troubled institutions and their portfolios of loans on misbegotten real estate.

The FDIC's premise is that banks that take on the troubled assets will work to improve their value over time. The agency estimates the loss-share deals cut will cost it $11 billion less than if the agency seized the assets and sold them at fair-market value. [Emph. added]

Good heavens. Sheila Bair has actually stumbled onto a sensible policy. She somehow understands that “fair-market value” might materially understate the NPV of cash flows the assets will eventually generate, and that it can make more sense to manage those assets over the long-term. I await the FDIC’s jihad against mark-to-market accounting. . . .

By the way, the FDIC’s strategy of active loss mitigation for the assets it’s inherited is materially at odds with the approach the agency is urging on the banks it regulates. From the Washington Post this past June:

But FDIC Chairman Sheila C. Bair said yesterday that the best course for banks, and for the broader economy, remained a combination of raising new capital and shedding old problems. . . .

"It is preferable to get them to sell assets in combination with raising capital in order to get the banks to be in a better position to start lending again," Bair said in an interview. "Getting them off the books is a cleaner posture for the banks." [Emph. added]

It’s too much to expect she realizes she’s endorsing two policies that are diametrically opposite one another, I suppose. . .