FDIC Strategy: Good Bank / Bad Asset Pool

From the WSJ:

The Federal Deposit Insurance Corp is poised to start breaking failed financial institutions into good and bad pieces in an effort to drum up more interest from prospective buyers.

The strategy, which is likely to begin soon, is aimed at selling the most distressed hunks of failed banks to private-equity firms and other types of investors who may be more willing than traditional banks to take a flier on bad assets. The traditional banks could then bid on the deposits, branches and other bits of the failed institution that are appealing.

"We want banks to participate in the resolution process, but we know it's a tough time for banks to participate in the resolution process," said Joseph Jiampietro, a senior adviser to FDIC Chairman Sheila Bair. He made the comments Wednesday during a presentation to a community-banking conference in New York.

The FDIC has found buyers for most of the failed institutions, but many prospective bidders are leery of taking on bad loans from a shuttered bank. That remains the case despite the FDIC's efforts to encourage bidders by providing loss-sharing agreements in about 40 of this year's bank failures.

But those types of deals aren't providing enough comfort to the FDIC, which wants to see a more-vibrant auction process.

"There are certain situations when assets are so distressed and make up a significant percentage of the balance sheet that strategic buyers are hesitant to participate in the process," said Mr. Jiampietro.

Details of the FDIC's latest effort to generate more bidding interest still are being worked out, but "we hope this will have greater appeal to strategic buyers," said James Wigand, deputy director of the FDIC's division of resolutions and receiverships, who also spoke at the conference.

The agency is considering several structures, including transferring the bad assets to a new entity established by the FDIC that will then be sold off. Another option, the FDIC officials said, is to allow traditional bidders to team up with buyers for the distressed assets.

The strategy could provide an opportunity for private-equity firms that complain they are being hamstrung in their efforts to buy failed banks. This month, the FDIC proposed guidelines for private-equity investors that could make it more difficult for them to compete against traditional banks for failed institutions.

Among other things, private-equity investors would be required to hold higher capital reserves than traditional banks. Although the proposals are aimed at deterring private-equity investors from buying and flipping failed banks, the firms contend that they would create an uneven playing field between private equity and traditional banks.