Sheila Does a Deal

The FDIC announced a $1.8 billion deal after the close on Friday. I 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?