Capital Gains Booked on FDIC Deposits Dropping

WASHINGTON, DC-A new metric from Keefe Bruyette & Woods, reported in the Wall Street Journal, shows how difficult the investment decision has become for frustrated distressed investors--in this case, of deposits from failed institutions seized by the Federal Deposit Insurance Corp. According to KBW, the average capital gain booked on these deals dropped to 2.5% of assets acquired this year, from 4.5% in 2009, in large part due to growing bidders.

This story of growing competition for mispriced risk, as most distress investors will tell you, has been repeated almost ad nauseam across most asset classes and opportunities. What, though, does it mean for the FDIC’s operations and the real estate investors hoping to participate in other programs by the agency, namely its structured sales offerings?

Some thoughts: to start out with, much of what has been happening could have been predicted, Lee Kyriacou, director of Novanta, tells GlobeSt.com. “Banks don't have a lot of lending options with their loan-to-deposit ratio well below 100%, and they are looking to deploy liabilities against higher-earning assets,” he says. “They don’t want to lend their money right now. As such, they are bidding up prices for FDIC-sourced assets.”

Also, the dwindling capital gain ratio does not necessarily mean that the best deals have passed, Tino Korologos, managing director with the Real Estate Consulting practice at Deloitte Financial Advisory Services, tells GlobeSt.com. “The majority of the banks that are being closed involve some sale to a healthy bank with a loss sharing agreement,” he says. “At this point in time, there haven’t been many sales of these loans, so I wouldn’t characterize the market as paying a premium.”

More to the point, Korologos says, the opportunities are far from over. “There are still hundreds of banks facing challenges and while some asset values may have started to stabilize, those are the prime assets in prime markets. The secondary and tertiary markets are not there yet.”

Still, there is a chance that the FDIC is eventually going to find the sale of these failed banks and deposits not profitable, or not even moving that much--and when that happens its other programs, such as its structured sales, may receive a boost, says Michael Ruggio, former FDIC senior counsel of the agency's Director and Officer Liability Section and now a partner with Roetzel & Andress. “With the recent declines in value of some of the assets these banks hold--particularly real estate--it is difficult for institutions to acquire some of these institutions unless they are guaranteed a higher degree of protection by the FDIC.”

By contrast, the FDIC has traditionally excelled in repackaging and reselling assets, Ruggio says, and the current iteration of this--the structured sales program--is doing well. “That, I think, is going to grow. We will see more assets funneled there.”