Last Friday the FDIC did a big cleanup of the banking sector in the 51st state, Puerto Rico. Three banks were closed, a total of $20.5 billion of assets were transferred to new owners. In the process, The FDIC recorded a charge of $5.3 in their DIF fund.
The Puerto Rican disaster is the biggest loss since the FDIC was forced to absorb IndyMac bank in 2008. Some perspective on the magnitude of the loss:
In 2009 the FDIC raised $45 billion from its member banks. This amount represented a three-year prepayment of the banks insurance premium. Therefore the premium income available to absorb losses is $15 billion a year. Puerto Rico just cost one third of the annual income.
Puerto Rico has a decent sized economy. The CIA puts their GDP at $88 billion. If they were a state they would be ranked 35th in Gross State Product (“GSP”). It would have just nosed out Mississippi. By way of comparison California has a GSP of 1.85T (21Xs PR) Illinois, 634b (7Xs PR), Florida $744b (8Xs PR) and Georgia $400b (4Xs PR).
PR has a total population of 3.9mm. California’s population is 137mm (36Xs PR), Florida 18.5mm (5Xs PR) and Illinois has12.9mm (3XsPR).
Based on the size of the economy and the population, the losses experienced by the FDIC in PR are way out of proportion. It begs the question; “What were the regulators doing?” The PR losses at the FDIC will not be born by the taxpayers. They will be born by the banks that are part of the system. They will be forced to pay higher insurance fees to offset the total losses. Tough luck for them, but those costs will be passed on to consumers dollar for dollar.
The D.C. mortgage lenders Fannie Mae (FNM), Freddie Mac (FRE) and FHA all have a big exposure to Puerto Rico. The losses relating to the PR loan exposure will be funded by Treasury (AKA – the Taxpayers).
This web site lists bank owned properties in Puerto Rico. Of the 214 listed homes 161 (80%) are owned by either Fannie Mae or Freddie Mac.
In the grand scheme of things Puerto Rico is not going to sink any of the Federal lenders. However, the losses in Puerto Rico are likely to be proportionately larger than in the 50 States based on population. The question is why? Puerto Rico is strategically important to the US. Financial aid is/was justified. A portion of that aid was delivered through Fannie, Freddie and the FDIC.
If we ever get around to addressing the problems of the Federal Government’s role in the mortgage market, on the top of the list should be the need to separate what are good lending standards and Federal subsidies.