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FDIC Gets a Little Less Generous

The FDIC is apparently tiring of getting taken to the cleaners when it sells failed banks, and senior writer Dan Freed says that's a first step in the right direction which shouldn't be the last.
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NEW YORK (

TheStreet

) -- The

Federal Deposit Insurance Corp.

is apparently tiring of getting taken to the cleaners when it sells failed banks.

The pop in the stock prices of banks that acquire failed competitors from the FDIC has been extraordinary to watch over the past year. The standout was

East West Bancorp

(EWBC) - Get Report

, which has practically doubled since it bought

United Commercial Bank

from the FDIC in November.

Several other banks, however, have seen benefits after picking up failed banks from the FDIC, ranging from giants like

JPMorgan Chase

(JPM) - Get Report

and

U.S. Bancorp

(USB) - Get Report

to tiny players that trade over the counter, such as

Sunwest Bank

(SWBC:OTC) in Tustin, Calif. Sunwest has bought two failed banks from the FDIC since September, and its stock was up more than 80% since then through Tuesday.

It is small wonder that

Citigroup

(C) - Get Report

executives remain bitter at the FDIC for awarding Wachovia to

TheStreet Recommends

Wells Fargo

(WFC) - Get Report

.

But now the FDIC looks like it will finally start getting some of the upside, according to a report in the

Wall Street Journal

on Wednesday. The report says the FDIC has struck a deal with

New York Community Bancorp

(NYB)

to allow the regulator to participate in some of the gains that followed after it bought

AmTrust Bank

earlier this month. The article says the FDIC will now look to arrange similar deals with other acquirers.

The article says the FDIC made $23 million on the AmTrust sale which is better than nothing, but a pretty small fraction of the roughly $800 million gain in New York Community Bancorp's market cap.

Still, it is a good thing that the FDIC is working to get some of this money back for taxpayers. What's troubling, however, is that it was actually New York Community Bancorp that proposed the arrangement, according to the article. Why should officials at the FDIC care, after all, since they are motivated merely by a vague fear of political repercussions if they strike a bad deal, while the executives at New York Community Bancorp have the profit motive working in their favor?

Also troubling is that the FDIC will only participate in the upside when the acquirers are "sizeable buyers that are publicly traded," the article states. Many of the buyers of these failed institutions are private, such as

OneWest Bank

, the former IndyMac, which is owned by a group that includes vehicles run by hedge fund wizard George Soros and

Dell Inc.

(DELL) - Get Report

founder, Chairman and CEO Michael Dell, among others. As I noted in an earlier article, these folks are presumably doing pretty well with their purchases. It is hard to believe the FDIC is driving as hard a bargain as it should with buyers of this stripe.

--

Written by Dan Freed in New York

.

Read More:

East West Bancorp is the poster child for stock rallies by bank acquirers.

The profits being made by privately run banks on buying failed institutions are a mystery.