FDIC eyes securitization for failed bank assets

NEW YORK Nov 5 (Reuters) - In a move reminiscent of the Resolution Trust Corp, the government agency charged with insuring deposits and thrifts may employ securitization as a tool to help mop up assets of failed U.S. banks.

There have been 115 bank failures totaling $126.7 billion of assets so far this year, and the number threatens to grow as financial institutions struggle to climb out of a deep credit crisis and recession. That has forced the Federal Deposit Insurance Corp (FDIC) to sift through its financial toolkit.

"We're looking at all options to maximize the value of assets in receivership and one of those options is securitizing some pool or pools of loans," said Greg Hernandez, a spokesman for the FDIC.

In the early 1990s, the federal government employed a similar method to dispose of the assets of failed banks and thrifts. During the savings and loan crisis, it created a new entity called the Resolution Trust Corporation, or RTC, whose mission was to dispose of assets, largely throughsecuritization.

"This is certainly a technique that the federal government has employed in the past, and the RTC actually securitized tens of billions of dollars of mortgage loans, both performing and nonperforming, over a period of several years," said Ed Gainor, a partner in law firm Bingham McCutchen in Washington, D.C.

Through securitization, loans can be moved off balance sheet, bundled together and sold to investors as securities in the U.S. asset-backed market. The process lets lenders remove current debt from their books to keep credit flowing to consumers for things like mortgages, autos and credit cards.

"Securitization is obviously a technique, if properly deployed, that can be very successful for the government in moving a large volume of assets to a wide investor base. We've done it before and we can do it again," said Gainor, who participated in several of those transactions while employed at another law firm during that period.

FURTHER FAILURES LIKELY

William Bemis, portfolio manager at Aviva Investors in Des Moines, Iowa, said there would be plenty of demand for assets of failed banks, including by fund managers chosen by the Treasury to run its Public-Private Investment Program, or PPIP, designed to absorb billions of dollars in toxic securities held by major banks.

"There are a lot of bidders for those assets. Some of the PPIP managers are looking at these assets as well. There's 10-plus bidders," said Bemis. "There's plenty of demand for them, so I don't know if they need to repackage them and expand the sale."

Still, with the volume of assets seen rising amid mounting bank failures, some argue securitization is the way to go as the securities are sure to draw interest from both here and abroad.

"It wouldn't surprise me if the FDIC is looking over the horizon and seeing perhaps hundreds of additional bank failures in the foreseeable future," Gainor said.

The FDIC's "problem institutions," or banks that run a higher risk of failure, grew to 416 in the second quarter with a combined $300 billion in assets. The level is at its highest rate since the fourth quarter of 1993, when 575 FDIC-insured banks were listed as problem institutions.

"There are potential investors, both in the U.S. and outside of the U.S., that would buy securities backed by those assets," Gainor said.

The battered commercial mortgage segment is also expected to result in billions of dollars in losses at U.S. banks.

About $570 billion in commercial mortgages are due to be refinanced between 2010 and 2011, according to property researcher Foresight Analytics LLC in Oakland, California, which estimates that the U.S. banking sector could incur as much as $250 billion in commercial real estate losses and result in 700 bank failures during that period.

In the meantime, asset-backed securities market participants are awaiting guidance from the FDIC over the treatment of securitizations as bankruptcy-remote structures with safe-harbor status, in light of the upcoming FAS 166/167 accounting changes that go into effect in the new year.

The new rules would require securitizations to be moved back on lenders' balance sheets and are raising concerns that heavier debt loads will crimp the flow of credit to consumers. (Reporting by Nancy Leinfuss; Editing by Jan Paschal )