Raft of deals for failed banks puts U.S. on hook for billions

September 1, 2009 - 0:0

WASHINGTON (THE WSJ) -- The biggest spur to deal-making among banks isn't private-equity cash or foreign investors. It is the federal government.

To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.
The headquarters of the U.S. Federal Deposit Insurance Corp. The agency faces an exposure six times the amount remaining in its fund that guarantees consumers' deposits.
Through more than 50 deals known as “loss shares,” the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk.
As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn't receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements.