Guest Post: Open Letter To FDIC
To: Sheila Bair, FDIC
Earlier this evening Advanta, which through its FDIC-insured bank Advanta Banc Corp makes credit card loans, declared its intentions to allow its securitization trust to go into early amortization, while concurrently launching a coercive tender offer for the securities issued by the trust. This marks the first intentional amortization event, which if unpunished, could jeopardize the stability of securitization markets, the government’s special programs to aid the market such as TALF, the bank’s depositors, and the legal rights of Advanta’s ABS investors.
As it currently stands, Advanta is on the express-train to insolvency. Faced with crippling losses and hazy capital strength (tangible equity / net managed assets = ~4%), the company decided to throw a first-of-its-kind Hail Mary pass in the hope that the FDIC would not place the firm into receivership.
Advanta intentionally avoided any and all actions to support their trust, widely used by peers, such as the issuance of additional subordinate securities. By doing so they drove the trust into imminent early amortization, reducing the value of investor’s securities, which are the bank’s off-balance sheet liability. Advanta then announced a $1.4bn predatory tender offer for the class ‘A’ securities of the trust. It was Advanta’s hope that by coercively purchasing the investor’s interest at a discount (using FDIC insured deposits, $1.1bn of which are brokered deposits), they could increase their capital support. This is akin to purchasing the ashes of your neighbors uninsured house (which you just burned down), to build a second garage. If these were on-balance sheet liabilities, this would be both illegal, and a subjective default. Moreover the FDIC would place the bank into receivership long before this could occur. The fact that these liabilities are off-balance sheet cannot, and should not insulate the bank from immediate receivership.
If this intentional amortization and tender offer were successful, it would quickly stomp the green shoots of confidence in securitization, that the Treasury and FDIC have worked so hard for, back into the ground. Advanta’s actions advantage equity holders at the expense of secured lenders, which will decrease the likelihood of investors taking further interest in this product. Other credit card lenders such as Capital One, Discover, Citibank, etc. could find it impossible to access markets in which investors have no confidence.
Lastly, Advanta’s actions increase, not decrease, the risk to the bank’s depositors. Advanta is using all available cash reserves (which the firm has built by raising brokered deposits) in order to purchase rapidly deteriorating assets. The bank is destroying all available liquidity, while decreasing confidence in its staying power.
The FDIC should send a clear signal to the market that reckless behavior by short-sighted management will not be tolerated. This is a clear cut example of when the FDIC should intervene to protect taxpayers, depositors, and the rights of ABS investors. Failure to act now will simply leave a larger hole to clean up later.