While many people are questioning the Federal Deposit Insurance Corporation’s (FDIC) strategy for managing assets seized from failed banks, we must look to the 1980′s Savings and Loan Crisis to see the reasoning behind their “risky business”. In 1989 the Resolution Trust Corporation (RTC) was an asset management company established by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), and charged with the liquidation of insolvent assets belonging to failed banks. These assets were primarily real estate-related assets, and between 1989 and 1995 the RTC closed or resolved 747 thrifts with total assets of $394 billion.
The RTC’s initial reaction was to conduct “block sales” of asset portfolios. This proved disappointing for the most part, because the purchasers discounted heavily for unknowns concerning the assets, and to reflect uncertainty in the market. Disappointed by the outcome of their “block sales” the RTC took a different approach implementing the equity partnership program, which aligned their interests with those of the new investors. By assuming these equity partnerships and thus retaining an interest in the asset portfolios, the RTC was able to take part in the extremely high returns being realized by the investors.
Today the FDIC is choosing to mitigate losses by holding onto their nonperforming loans until the market returns. They are acting as a long term investor, and making a bet on the recovery of some of the most distressed condo developments in the market. If history is any indication of the future I would say they are making the right decision; however there are always other variables to consider.
An important question to be asking is, what effect did the initial “block sales” have on the real estate market? It seem to me that they got the ball rolling and got investors spending again, which is something that’s missing from the market today. Without this sort of incentive, markets today are, for the most part, at a stand still. Buyers are waiting for those fire sale prices, and sellers are hanging on as long as possible in hopes that they aren’t forced to sell at the bottom.
In order for the FDIC’s strategy to be a success they are counting on the private sector to be forced to sell first and establish the market. Should this be the case it will be a win not only for opportunistic buyers of real estate, but also for stake holders who had hard deposits in the failed banks.