Another Guaranteed Box Full of Crap From the FDIC

 |  Includes: KBE, KRE
by: Kid Dynamite
This is now the EIGHTH time I've used the Tommy Boy analogy on my blog (type Tommy Boy in my search box for the others):

Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time.

Today's reference comes courtesy of a Barrons article (h/t Barry Ritholtz)

Before the financial crisis is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks. The rapid closures have drained the agency's cash reserves.

The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC's Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

And who makes up the losses? The notes are backed by loans that are bundled into agency-administered pools. But ultimately, the losses could be absorbed by Uncle Sam.

To summarize - the FDIC has been taking over the crappy assets of tons of failed banks. There is a problem - they are running out of money (or ran out, long ago) with which to do this. Thus, they need to sell the assets they've taken over to raise more funds to take over more failing banks.

Problem: the assets aren't worth much - 10c-50c on the dollar, according to Barrons. Solution? Mark that box full of crap GUARANTEED! Remember, the FDIC is supposed to be funded by the banking industry. How then, do they get a government guarantee? Of course, with the guarantee, the assets will sell for a price much higher than 10c-50c, after all, it's GUARANTEED by the USA! So, the FDIC gets paid a much higher price, and who eats the losses? Uncle Sam, of course. The FDIC is supposed to be an agency that is self-funded by the institutions it insures. From an old Bloomberg article:

Our operating budget does not come from taxpayers,” Bair said during the meeting. “We are completely self-funded in that regard.

And yet, here we see that the FDIC is looking to benefit from a guarantee by the taxpayers! That doesn't quite meet my definition of "self-funded."
Even more absurdly, unless you believe that the "market" is crazy in pricing these assets at 10c to 50c on the dollar, and that they are really worth more but are somehow depressed due to liquidity or other fantasy nonsense, this government guarantee is GUARANTEED to result in payouts from the government to the purchasers of these assets who will be overpaying for them (knowingly, but not caring so much because they are guaranteed!).
Back to the Barrons article:

They aren't really selling the bad assets. They're selling the equivalent of a Treasury bond without congressional approval," says William Black, a former thrift regulator. "It hides the economic substance of what's really happening—an unlimited taxpayer bailout.

and the final word from the FDIC:

The FDIC contests the characterization, saying it doesn't expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

Wait wait wait... The FDIC doesn't expect a claim on assets trading at 10c on the dollar because of an equity cushion to absorb the losses? Where have I heard this before... thinking... scratching my head... furrowing my brow pensively. OH YES! Collateralized Debt Obligations! The equity tranche and the diversification made it impossible for higher rated tranches to lose money! (SARCASM ALERT!) There was only one problem: "impossible" turned out to be "absolutely certain."
Jeezus. The scam goes on. Government subsidies of the FDIC, which of course, is another indirect bailout of the banks who are the ones who are supposed to be funding the FDIC.