thought it was interesting from a number of perspectives. As usual, I
find fault with it.
The summary terms of the transaction can be found here.
The following is what I thought important:
-This is a run of the mill MBS with bells and whistles. The big whistle
is the guaranty. The FDIC has puts its chomp on the whole thing. That
means that this has the full faith and credit of the US government
behind it.
-The deal was priced as a discount to Ginnie Mae paper (also full faith
guaranty). The FDIC remarked that there was “robust” demand for the
paper. I should hope so. I high yielding AAA should not be a hard sale
these days.
-The 1.8B deal was backed by $3.6B in mortgages that FDIC owned as a
result of acquiring failed banks. The advance rate on the deal is 50% of
face. What this means is that the mortgages in the portfolio are swill.
No wonder the FDIC had to put its name on this to get it out the door.
-The collateral was valued at 70% of par. This is the same discount that
was applied to the sale by FDIC of its performing mortgages that came
from the failed Indymac bank. That deal has proved to a bust. The ex
Goldman guys who put the Indymac deal together are now just raking it
in, much to the chagrin of the FDIC and at the expense of the old
Indymac borrowers.
-The Use of Proceeds is important:
(The proceeds) will be used to pay creditors, including the
FDIC's Deposit Insurance Fund (DIF).
I think it is necessary to ask why this deal was done. I can’t come up
with a valid reason. This is not a sale of assets. It is just a repo.
The FDIC retains all of the risk associated with the underlying
collateral.
The FDIC does not need this $1.8b. They just collected $45B from the
banks that they provide insurance to. The banks were forced to cough up
three years of premiums paid in advance. These borrowed proceeds will go
back to the DIF fund and add to the kitty of money available to absorb
more losses from the bank failures that will come on every Friday. But
so what? The FDIC is just borrowing reserves. They need equity to
support the coming losses, not more debt.
From what I see this deal was priced rich. Barclays Bank was the sole
book runner. I am sure they got paid well for that slot. The investors
must love it too. So if the buy side loves it the sell side has got to
be a bit poorer as a result. Why would the FDIC want to put money in
investors and underwriters pockets? The most likely answer to this is
that they wanted this initial deal to go out the door quickly. They
must be planning to do more of these deals.
I hate the idea that yet another government entity is now in the RMBS
business. We already have three catastrophic failures on our hands,
Fannie, Freddie and FHA. We don’t need another one.
I hate the idea that this has the full faith and credit of the US. This
is a repo 105 deal all over again. It is just optics, there is no
substance. There is no reduction of risk to the taxpayer. This
transaction just adds to the overall cost.
The FDIC has a $500b line with Treasury. This borrowing could have been
accomplished much cheaper if that route were taken. The reason that did
not happen is just more optics. If the FDIC had borrowed from Treasury
the word ‘bailout’ would have been uttered. We wouldn’t want that to
happen would we?
This is just a measly $1.8b. So who cares? At the end of the day no one
will. But this debt, like all of the other $7 Trillion of liabilities
will not appear on the balance sheet of the US. But it should. No one
wants to tell the truth of exactly how much debt the central government
has. Much has been said of late of how Greece and others have
manipulated their books to make things “look better”. This is just
another example of how the US is doing exactly the same thing.
The most troubling thing about this deal is the precedent being set. The
final line from the FDIC on the transaction:
This offering marks the first issuance of notes by the FDIC
since the early 1990s and the first issuance by the FDIC of FDIC
guaranteed debt backed by the full faith
and credit of the U.S.
Are they proud of this? They are using the most valuable resource this
country has, our already tarnished credit rating. The more debt that is
issued in our name, the poorer we become. When does it stop?
Good article. It tells me that Sheila definately knows that we are in deep doo doo. Your right in asking why? It's obviously a test to see how much attention it draws. This is her version of stealth debt. Stay tuned to see the size of the next one.
Every Friday I look at all the failed banks. It does not even make the news when there is $2 billion in failures. I am thinking that you are correct in this being stealth debt. They actually do not even need to do it on Fridays anymore. It is just so common as to not even be newsworthy.
Another "Thank you!" to Bruce for a lucid. readable discussion of the FDIC's (and our) situation. Usable machanism, broken components.
FDIC got a higher price due to the guarantee. However they will have to give a lot of it back. The presence of the guarantee gives the servicer more incentive to package the repurchase request when the loans default than servicing the loans to prevent that. FDIC must have some provisions in the asset sale agreement to get them off the hook to pay the guaranty, forcing the buyers to at least try to collect the obligations.
May I offer a title revision?
"Sheila Does a Deal on Her Knees"
Thanks Bruce. You wrote a very concise, understandable summary of the issue.
The RMBS virus medicine is being spread through many government entities for a reason. We will increasingly be forced to get out a calculator to add up the losses from a variety of USG subsidiary entities. Just the way Enron did it for years.....a complicated ploy to disguise insolvency.
I think both Leo and Bruce have valid points.
I would like to agree with Bruce on the CDS, but financial companies are unique, they are selling their reputation, more than a hard product such as Cisco. A run on the bank can start with a rumor.
If we just enforced the rules on naked shorts we could
prevent the naked bear raids that destroy new issues\healthy
companies. The uptick rule had things in nice equilibrium....
The biggest FDIC deal is still in the works. By the way, Bruce, I responded to you why not all CDS activity is "benign risk hedging". When hedge funds routinely naked short a stock to push a company into bankruptcy, and profit off their CDS positions, then that is just plain criminal.
Leo,
You could get every hedge fund in the universe to short the stock bonds and CDS of Cisco Systems (or a bunch of other names). It would come to nothing. Wouldn't hurt the company or the investors. It would kill the guys who tried it however.
The reason is that Sys is solid. LEH, Citi etal are/were not. The were vulnerable to an attack because they were weak. Look at the LEH story. These guys were dead months before the went tabioca. CDS may have stepped this up by a week or two. The outcome would have been the same either way.
Coyotes hunt in packs and prey on old sick animals. So we think they are terrible and try to kill them. But really they are just culling the weak. They are doing the herd a favor. There is not enough food for all the animals to live on. Some must die from time to time.
You and the others are making CDS to be like the coyote and you want to kill it. Watch out, you will regret what you have done.
Score one for Bruce.
At the end of the day, I always ask myself a simple question "who profits the most?" from CDS, private equity, hedge funds, commodities, whatever...The margins on these credit derivatives are huge business for banks peddling them. Again, if used wisely, I am all for them as far as normal hedging is concerned. But when they are flagrantly abused, then I get pissed off, especially when it means people lose their jobs or pensions.