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"FDIC loss-sharing in Wachovia deal is biggest ever
Monday September 29, 5:31 pm ET
By Marcy Gordon, AP Business Writer
FDIC loss-sharing agreement in Wachovia deal is largest ever; helps ensure taxpayer protection
WASHINGTON (AP) -- The FDIC's agreement to share potential multibillion-dollar losses on Wachovia Corp.'s mortgage loans with buyer Citigroup Inc. is a way for the government to ensure a solution at the least cost to taxpayers, banking experts say.
The government made similar deals with buyers of crippled institutions during the savings and loan crisis, and in more recent years, but never on this big a scale for an individual bank.
It's "a precedent-setting transaction," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.
The playbook for resolving troubled banks "seems to be made up as the regulators go along," Petrou said, noting the different circumstances recently involving Washington Mutual Inc. and IndyMac Bank last summer.
In the deal orchestrated by the Federal Deposit Insurance Corp., branch-hungry Citigroup is buying Wachovia's banking operations and agreed to absorb as much as $42 billion in losses from Wachovia's $312 billion loan portfolio. The FDIC will cover losses above that level. Citigroup is giving the agency $12 billion in preferred shares and warrants to compensate it for taking on the risk.
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In my opinion, they're really setting everything up for critical failure. Before I'd say we had, say, 30% of a painful but workable systemic failure, 70% being OK. But the way they're setting things up, we now have 90% of being ok but now 10% of CRITICAL, systemic, permanent-pain-inducing systemic failure. That seems to be the way they're thinking. I don't like these odds.
I see three possible outcomes to this deal:
A) Citi manages to keep all the good loans, smartly gave all the bad ones to FDIC. FDIC crosses their fingers that the 12B$ in funny stock money covers the remaining 270 billion. 13% of the loans need to go bad for the FDIC to start taking losses. 17% have to go bad before there is no risk guarantee left from C (assuming C's stock price STAYS THE SAME)
B) Citi somehow got the bad loans and FDIC got the good ones (huh, unlikely). That's the better scenario.
C) WORSE SCENARIO: Loans are bad all around. FDIC eats it in the shorts, C eats it in the shorts. C stocks and warrants drop in price. Now FDIC not only eats losses, but doesn't get compensated for the risk as the C stock is down. This is the part where both C and FDIC now need a bailout. :-(
As of today, the FDIC's "risk compensation" just dropped in value by at least 1B$.
Monday September 29, 5:31 pm ET
By Marcy Gordon, AP Business Writer
FDIC loss-sharing agreement in Wachovia deal is largest ever; helps ensure taxpayer protection
WASHINGTON (AP) -- The FDIC's agreement to share potential multibillion-dollar losses on Wachovia Corp.'s mortgage loans with buyer Citigroup Inc. is a way for the government to ensure a solution at the least cost to taxpayers, banking experts say.
The government made similar deals with buyers of crippled institutions during the savings and loan crisis, and in more recent years, but never on this big a scale for an individual bank.
It's "a precedent-setting transaction," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.
The playbook for resolving troubled banks "seems to be made up as the regulators go along," Petrou said, noting the different circumstances recently involving Washington Mutual Inc. and IndyMac Bank last summer.
In the deal orchestrated by the Federal Deposit Insurance Corp., branch-hungry Citigroup is buying Wachovia's banking operations and agreed to absorb as much as $42 billion in losses from Wachovia's $312 billion loan portfolio. The FDIC will cover losses above that level. Citigroup is giving the agency $12 billion in preferred shares and warrants to compensate it for taking on the risk.
"
In my opinion, they're really setting everything up for critical failure. Before I'd say we had, say, 30% of a painful but workable systemic failure, 70% being OK. But the way they're setting things up, we now have 90% of being ok but now 10% of CRITICAL, systemic, permanent-pain-inducing systemic failure. That seems to be the way they're thinking. I don't like these odds.
I see three possible outcomes to this deal:
A) Citi manages to keep all the good loans, smartly gave all the bad ones to FDIC. FDIC crosses their fingers that the 12B$ in funny stock money covers the remaining 270 billion. 13% of the loans need to go bad for the FDIC to start taking losses. 17% have to go bad before there is no risk guarantee left from C (assuming C's stock price STAYS THE SAME)
B) Citi somehow got the bad loans and FDIC got the good ones (huh, unlikely). That's the better scenario.
C) WORSE SCENARIO: Loans are bad all around. FDIC eats it in the shorts, C eats it in the shorts. C stocks and warrants drop in price. Now FDIC not only eats losses, but doesn't get compensated for the risk as the C stock is down. This is the part where both C and FDIC now need a bailout. :-(
As of today, the FDIC's "risk compensation" just dropped in value by at least 1B$.
