FDIC Sells Junk Zeroes, Kicking the Can Further Down the Road

| About: Corus Bankshares (CORS)
The FDIC announced two deals yesterday. The first was a 1.38B CDO that was “secured” by $4.5 bil of Corus Bank (CORS) sludge. The assets were non-perform construction loans and REO “assets.” The coverage ratio on this one is 3.25X1. This implies the assets are worth about 30 cents on the dollar.

The second transaction was a $653mm deal secured by 1.2 B of Franklin Bank SSB loans and more of those REO assets.

The debt sold yesterday against this package of swill is non-interest bearing. The notes sold at a discount. At the maturity (up to four years) the junk notes will be paid at par.

I don’t think you could sell this deal to even IKB. It is just crap. But it went out the door in about two seconds. The reason is that the discount notes are full faith and credit of both the FDIC and Uncle Sam. These notes are as solid as Treasuries and the yield is better.

The zero coupon feature was done because the underlying assets have no predictability of either cash flow or disposition of the assets.

You have to ask why this was done like this. The FDIC is not in need of cash at the moment. They are sitting on $50b or so of Special Issue Treasury notes. If they were a little tight they have a $500b line of credit from Treasury that they could draw on with no questions asked and much cheaper pricing than these deals got.

These are not securitized financings. This gets nothing off the books of the FDIC. It is just straight debt. So far this year there have been about $4b of this type of paper issued. More is clearly coming. Does it matter if the FDIC borrows another $20b in our name this year? Not really. $20b is just a drop in the debt bucket these days. The FDIC would not need to borrow money if it’s DIF Fund was at the $50-60b surplus that it should be at. This debt is just another way to kick the can down the road a bit farther. The FDIC needs equity, not more debt. But in this case equity equals bailout and we wouldn’t want that.