Wednesday, January 28, 2009

FDIC May Run the "Bad Bank"

The FDIC wants to run the "bad bank" the government might set up:

The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said. “It doesn’t make sense to give the authority to anybody else but the FDIC,” said John Douglas, a former general counsel at the agency who now is a partner at Paul, Hastings, Janofsky & Walker, a law firm in Atlanta. “That’s what the FDIC does, it takes bad assets out of banks and manages and sells them.”
The FDIC doesn't strike me as the right agency to run the bad bank. The FDIC has experience selling the assets of failed banks, but it doesn't have a lot of experience with the kinds of assets that are likely to go into the bad bank. As the Bloomberg article notes, the bad bank "would buy the toxic assets clogging banks’ balance sheets." The toxic assets are mostly structured credit products—CDOs (super-senior and mezzanine), MBS CDOs, ABS, CMBS, synthetic CDOs, etc. To my knowledge, the FDIC doesn't have much experience with structured credit products. And believe you me, these aren't products you can learn about on the fly. This looks to me like more Sheila Bair looking out for Sheila Bair. Maybe she should spend less time on the phone with journalists.

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