Does FDIC think about the impact it's having on commercial real estate
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Let me start off by saying that of course FDIC's main mission is to get the best deal it can for taxpayers. The agency is trying to sell off a huge number of assets that it has seized from failed banks. Of course it is going to do what it can to get the best price. But it would be nice if it gave some thought to the US commercial real estate market and the impact its actions could have there. Two recent news items suggest that CRE is not at the forefront of FDIC's thinking as it goes about dispersing the assets now under its control. The most blatant example is news reported by Bloomberg that FDIC is holding a $1 billion auction in which it is selling off loans - including a loan to the build a W Hotel in Atlanta - that may trigger write downs among other banks as well. Half of the loans were originated by Silverton Bank, according to Bloomberg - but several other banks joined Silverton in providing the $80 million W construction loan. These banks will have to take write-downs as the Silverton loan goes to auction, and possibly push many to the edge of insolvency. It's not just this auction: reportedly of the $50 billion or so in loans seized by FDIC, 63% involve other lenders. The other news item - again, reported by Bloomberg- also points to future woes for CRE, thanks to FDIC actions. Reportedly FDIC is seeking pension fund money to invest in failed banks. It's a smart move for FDIC, which sees this is a good way to lower fees, according to Bloomberg. But the CRE industry should wonder if these funds will re-allocate money slotted for acquisitions or other investment into FDIC deals.
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The FDIC auctions are a move in the right direction, as the agency must do something to quickly clear up the logjam of bad CRE loans. However, I question the auction methodologies being employed by the Agency. Are their methods truly maximizing values for taxpayers? Unless there is full visibility into the process and the auction marketing is spearheaded by market experts (e.g., private sector brokers), the taxpayers are getting short-changed. The FDIC must be held accountable to the public and make sure they are maximizing asset values through a fair auction process run by private sector brokers. With the online tools available to them now, there is no excuse for anything less.
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Warren Buffett referred to the prevailing approach as "mark-to-myth". By selliing assets, albeit at firesale prices, the Feds are further contributing to establishing a market. This is not new. The RTC did the same in the early 1990's. It's painful but necessary. The chips are going to fall, as are the Zombie Banks, so let the chips fall where they may. Holding assets, rather than selling them, is akin to keeping one's crazy uncle in the closet. He's still crazy, even if no one sees him while he's in the closet. So too, holding severely depreciated assets does not make them worth more, unless one thinks that recovery of significant value is destined to occur in the short term via general market appreciation.