This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Moral Hazard at the FDIC

There has been a lot of discussion about Moral Hazard regarding the large bank bailouts (which the recent financial reform legislation apparently now has "institutionalized"). And there has been a lot of commentary about the lack of help for America's community institutions; in 2010 alone, the FDIC has closed 108 such banks (at least as of this writing). It just appears to us that Washington protects the Wall Street firms to the detriment of Main Street.

We have written several blogs about this "unholy" alliance . Now, it appears that the FDIC, whose insurance fund was in the red by $21 billion at the end of the first quarter, has decided to become a player in the private sector by partnering with, you guessed it, Wall Street! This is a major strategic change in direction at the FDIC in how they deal with the disposal of troubled assets at failed institutions. Specifically, the form of the strategic direction change is to allow a partnership with the private sector in order for the FDIC to participate in the upside potential of loan work outs and sales. In technical lexicon, this is called an "Entity Sale" as opposed to a "Direct Sale" of the assets.

Partnering is not new to the FDIC, and it appears that the current strategic shift had its roots in the Resolution Trust Co. (RTC) model. The RTC was the entity that dealt with the troubled assets from the S&L crisis era. At that time, the FDIC, through the RTC, took back stock and warrants as part of their resolution in the largest failure cases of Continental Illinois and First City. This created the public perception and significant outrage that "nationalization" was occurring; this seems eerily similar to today's attitudes.

In one of their first forays into the entity sale strategy, the FDIC sold the assets of First National Bank of Nevada for between 30% and 50% of face value to Private National Mortgage Acceptance Company, LLC (PennyMac), a company founded by the former president of Countrywide. The FDIC provided interest-free loans to PennyMac, but kept an 80% equity stake, hoping to recover some of the losses should the real estate market turn upward.
1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.74 -1.15%
FB $117.58 0.73%
GOOG $693.01 0.29%
TSLA $240.76 -2.81%
YHOO $36.60 0.03%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs