24/7 Wall St.

The Federal Deposit Insurance Corporation has concluded the sale of $1.45 billion distressed assets. It consisted of performing and non-performing residential and commercial construction loans in distressed markets.

The sales to Diversified Business Strategies and Stearns Bank NA were conducted via the use of two private/public partnership transactions, with Keefe Bruyette Woods hired by the FDIC to market this to potential bidders.

The FDIC said that these structured sales utilize the asset management expertise of the private sector, while retaining for the FDIC a stake in all future cash flows generated by the workout of the assets .

These loans came exclusively from the failed First National Bank of Nevada.  In the two recent transactions, the FDIC placed the loans into a limited liability corporation (LLC). The FDIC retained an 80% interest in the assets, and the winning bidder picked up a 20% stake. Where it gets interesting is that these sales note that once certain performance thresholds are met, then FDIC’s interest will drop to 60% with 40% going to the buyers. Future expenses and future income will be shared on and mirror the percentage ownership.

Because of retaining an interest, the FDIC stands to benefit in the future return of the portfolio.  It also receives immediate money for its 20% interest in the portfolio.

Eighteen bidders submitted 30 bids for both pools of loans and this closure puts the total amount of assets sold at $3.2 billion over the last year from five separate transactions.  While there might not be a set price nor a set structure, the FDIC noted that it plans to pursue this and other sales strategies.

Now if you can get a hold of the documents about what the assets are and what each total priced at, perhaps some form of “price discovery” can be used for pricing the real value of bank balance sheets.  Our bet is the same as most: the value will be far less than what the banks are pricing them at today.

Jon C. Ogg
February 26, 2009