H. Rodgin Cohen's (Failed?) Quest To Backstop Every Bank... Ever (And Usurp Geithner's Throne)

Over the past two weeks many banks issued press releases and opened up the PR spigot to indicate just how stable they all are now that a few have managed to pay down their TARP commitments. This of course, is nothing but a complete farce, and simply yet another chapter in the "consumer confidence" game played by the administration and its financial underlings. In order to see just how much the banking system depends on the continued unlimited wallet of taxpayers and Geithner's printing presses, and how much certain law firms continue to depend on the somewhat less limited wallet of Wall Street, I present an October 31, 2008 letter recently obtained by Zero Hedge, in which Sullivan & Cromwell, Wall Street's #2 favorite law firm (or is that #1: I am sure Wachtell Lipton would have a few choice words with regard to that particular league table rating, although it may be hard pressed to match S&C's $241,975 in donations to the Democratic National Convention), goes to town to make sure that its well-deserving clients including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo get to not only have the taxpayers' cake (in perpetuity), but eat more and more of it each day. Before I get into the meat of the letter, it just has to be a complete coincidence, that these are exactly the same 9 firms that a mere 2 weeks prior to this letter was sent out had a rather direct head to head with the President's Working Group, during which each one was apportioned $x billion in TARP after exactly zero due diligence, in order to plug the dike of complete financial collapse with almost a hundred billion fingers of taxpayer dollars. But, as they say, once you've had a taste of the free buffet, you only want more and more and more. True to form: the banks promptly showed up for another serving, and Sullivan & Cromwell was gladly there to charge taxpayers at the preferential rate of almost a thousand taxpayer dollars an hour, compliments of one H. Rodgin Cohen (more on him later).

Now it is no secret that when it comes to taxpayer guarantees and subsidies, the TARP is and has always been mere window dressing: as a backstop tranche, it only has to do with equity values, which as any rational observer of the financial system (this list of course excludes the likes of Dick Bove) knows full well, are at best equal to zero if all the FAS 115, 157, Level 3, Mark To Magic and other accounting sleight of hand gimmicks were to be removed.

The math is simple: bank assets have to equal bank liabilities + equity. The liabilities are there (and growing), yet the assets shrink every single day backstopped by such solid collateral as emptying midtown office space CMBS, bankrupt hotel and Harlem multi apartment whole loans, and 2nd liens in Ukrainian and Argentinean bison farms. If equities were marked appropriately, shareholders would likely have to be paid to own a share of Citi or BofA.

Then again, caught in a massively engineered short squeeze over the past 3 months, financial stocks ended up bottlerocketing straight up, not on fundamentals, or even on charts, but merely on two large stock loan issuers (themselves participants in the list of nine mentioned above) making it not only impossible to short fin stocks, but forcing anyone currently short to cover. And while TARP manipulation serves at best to fool some outlying marginal retail investors into a false sense of calm, the TLGP is where the real action is. And as of May, there was a lot of action: $345 billion worth of.

One last background item worth pointing out is that recently the FDIC realized its Deposit Insurance Fund was on the verge of depletion, sucked dry by those very banks that seem to fall like dominoes every Friday (or lately Thursday, with the total YTD now passing an unprecedented run rate of over 100 for the year). Recall that the FDIC's primary responsibility is to make sure that come hell or high water, deposits are secured and insured. Well: surprise, they aren't, which is why in March Sheila Bair announced several emergency steps to restore the rapidly dwindling reserves of the FDIC, most notably having to do with charging incremental assessments to both depository institutions and bank holding companies (well that, and also tapping a huge line of credit directly with the Treasury in case Citi were to finally admit that it is nationalized in all but name).

Enter H. Rodgin Cohen and Sullivan & Cromwell, on behalf of the Ben's Big 9 Bailout Beneficiaries (BB9BB). The letter sent to the FDIC pretty much made it clear that banks want not only to gestate in the warm cocoon provided by taxpayers' dollar bill plastered abdomens, but to have immediate recourse to essentially unlimited FDIC funding at practically no cost to them for ever and ever.

Some of the key demands made by the BB9BB - S&C cartel include:

1. The FDIC guarantee should be an unconditional guarantee of timely payments of principal and interest when due backed by the full faith and credit of the U.S. government.

Goodness, we wouldn't want to have conditions when providing the entire American financial systems with a taxpayer-funded blank check now would we. A blank check with even one footnote of small print is inappropriate when dealing with the instigators of the biggest financial catastrophe since the Depression. So no fine print please. Done and Done.

2. Because the FDIC's guarantee expires on June 30, 2012, there should be an
acceleration provision to June 30, 2012 in the event of default for guaranteed debt that matures after that date.

Wouldn't want forced short-squeezors, pardon, investors, to somehow think that there is such a think as risk in the banks' capital structures now, would we. In fact, this whole concept of risk, let's just do away with it entirely as the market trades merely on rolling buy-ins and follow on equity issuances. Done and Done.

3. If investors regard the guarantee as weak, they will look to institutions' underlying financial strength, thus lending to a tiered market where weaker institutions have insufficient access to liquidity.

What an abhorrent concept - judging a bank by its fundamental merits: the Horror, the Horror. How would the FDIC possibly allow a financial institution to be judged based on its "underlying financial strength": don't they realize that the BB9BB have made it all too clear that we now live in a communist regime where nobody can every fail based on their own "merits" and that everyone will be bailed out in perpetuity. How shallow: H. Rodgin Cohen, please explain to them how the system works. Done and Done.

4. Institutions should have the flexibility to issue senior unsecured debt not guaranteed by the FDIC, regardless of the stated maturity.

Yes Goldman, we realize you want to pay record bonuses even as unemployment hits 11% without starting a mass revolutionary uprising. Duly noted and Done and Done.

5. The Banking Organizations (BB9BB) agree with the FDIC that participating entities should have some mechanism to opt in or out of guarantees on a per issuance basis but believe that this option should not be limited to debt with stated maturities after June 30, 2012. [T]he Banking Organizations believe that this limitation will not achieve the FDIC's stated objectives [of not raping the taxpayer? of course, the BB9BB would like to interject here].

Hell, just make guarantees perpetual: it is not like the financial system will ever rebound. After all who are we fooling here? Well, aside from CNBC's primetime TV audience, wink, wink. Nonetheless, we advise readers to read the "cliff maturity" justification on or around June 30, 2012. This coincides nicely with the $1 trillion in CMBS that comes due about the same day. Should prove to be an amusing "day", "week", "month", "end of tenure" for whoever is president then. But who cares: that will occur at a time when the U.S. sovereign debt approaches something with a "quad" and ending in "rillion", and all the current BB9BB executives (long retired then) will have that 98th, 99th and 100th house in Cannes, Fiji and inside the crater of Mt. Etna. Done and Done.

6. We believe it would be appropriate to exclude public sector clients, banks and other financial institutions from because imposing a 75 basis point on deposit accounts for such institutions would eliminate the yield paid on these products and potentially encourage such institutions to move funds into higher yielding "unguaranteed" products, thus potentially reducing a participating entity's liquidity sources... Considering the current level of interest rates, the [BB9BB] believe that the 75 bp fee is too high with respect to the Federal Funds, and should be lowered. The high cost of insuring Federal Funds may lead institutions to other secured borrowing sources so that, in lieu of Federal Funds, financial institutions will, in order to mitigate their funding costs, increase their utilization of secured borrowings sources such as the Federal Reserve Discount Window, the Term Auction Facility and the FHLB advance program. Such an outcome would not achieve the FDIC's goal of improving short-term unsecured inter-bank funding markets [and, again, of not raping the U.S. taxpayer, which is so totally contrary to the lobbying effort contained herewith]

What irony: the BB9BB are demanding for unlimited guaranteed and unguaranteed backstops and someone dares to ask them to pay for it. If this isn't the most unhinged and inequitable concept the BB9BB have ever heard, then nothing is. H. Rodgin Cohen will set it all straight, and make sure that not only can banks borrow Fed Funds but taxpayers will have to pay them a portion of how much they borrow and at what rate. In fact the bank that recently ended up "borrowing" 7% Fund Funds was actually a lender, and H. Rodgin Cohen made sure that instead of paying 7%, they received that amount of money. Done and Done.

7. Under 370.6(e) there is a 150 basis point penalty fee and enforcement mechanisms for debt that is represented as being "guaranteed by the FDIC" but which exceeds the guaranteed amount. In order to enhance investor confidence in the Debt Guarantee Program, the Banking Organizations propose that investors be expressly allowed to rely on the borrower's representation with respect to the availability of the guarantee for a particular debt issuance.

You see, FDIC, it is simply unfair for investors and depositors to have an objective and unbiased representation. Especially since the BB9BB have every intention of abusing the guarantee/non-guarantee barrier at every possible occasion. However, this whole 150 bps penalty, well, that's just too rich for S&C's billionaire clients' blood. Let's cut a deal: the BB9BB will represent the debt in any way they want, and in turn, the FDIC will not only turn a blind eye to any and all (guaranteed) abuses that occur as a result, but also will not charge any penalty or enforce any actions against this outright abuse? Done and Done.

This and much more is contained in the attached missive, which was undoubtedly scribbled in short-hand by the BB9BB on the bent over back of one H. Rodgin Cohen. I recommend readers familiarize themselves with just how the world's most effective lobby power works when it hegemonic status quo is even remote threatened.

Which brings us to topic #2 for today, that of the mellifluously sounding H. Rodgin Cohen. Frequent readers may recall, that H. Rodgin Cohen, whose name rolls out like a haiku by a moderately drunk Basho, was supposed to become none other than Tim Geithner's right hand man, yet something odd happened on the greenback-bricked road which was supposed to guarantee H. Rodgin Cohen's unbridled immortality by having his portrait prominently featured on the $100 trillion bill. Just what was, as George Stephanopoulos noted, the "issue that arose in the final stages of the vetting process." While still on the topic of the haiku-esque H. Rodgin Cohen, many relevant questions brought up, and few answered, in this craftfully worded post by Tom Blumer of NewsBustes. I recommend readers familiarize themselves with the persona that nearly became TurboTaxTim in waiting. In the meantime, Zero Hedge will continue to present any and all lobby papers by Sullivan & Cromwell on behalf of the BB9BB, just in case H. Rodgin Cohen has decided to bypass the post of Secretary of the Treasury and apply straight for that of Overlord and Viceroy of all of Western Capitalism. With the backing of such "clients" as Goldman Sachs, he is essentially guaranteed to "win" that particular popular (or not)election.



hat tip Richard

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FDIC Releases State Loan-To-Deposit Ratios

The FDIC today made public for the first time host state loan-to-deposit ratios. Alas, the data is quite dated, as it represents the June 30, 2008 snapshot. Since then one can imagine things have changed quite a bit. The data are being released in order to calculate compliance with "section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994."

Here is what the FDIC has to say about section 109:

In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 106 of the Gramm-Leach-Bliley Act of 1999 amended coverage of section 109 of the Interstate Act to include any branch of a bank controlled by an out-of-state bank holding company.
To determine compliance with section 109, the appropriate agency first compares a bank's statewide loan-to-deposit ratio2 to the host state loan-to-deposit ratio for a particular state. If the bank's statewide loan-to-deposit ratio is at least one-half of the published host state loan-to-deposit ratio, the bank has complied with section 109. A second step is conducted if a bank's statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank's interstate branches. A bank that fails both steps is in violation of section 109 and subject to sanctions by the appropriate agency.

Going forward, the FDIC will release this data on an annual basis, so readers will have to wait until June 2010, to realize that loan-to-deposits for the current period is likely over 200% or below 50%. One could easily make arguments for both.

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FDIC Starts Extending The Maturities Of Various Alphabet Soup Crutches

The FDIC announced a proposed extension of the first of many alphabet soups currently propping up the banking system. In this case, it is the Transaction Account Guarantee (TAG) component of the TLGP program. The proposed extension (the first of maaaaany) will push the maturity from December 31, 2009 to June 30, 2010. From the report:

Currently 7,107 IDIs participate in the TAG program, of which approximately 3,744, or 52.7 percent are small entities. Within the universe of small institutions, 1,072, or 28.6 percent did not have TAG eligible deposits as of the March 2009 Report of Condition and Income for banks and the Thrift Financial Report for thrifts (collectively, “March 2009 Call Reports”); thus, they were not required to pay the 10 basis point fee currently assessed for participation in the TAG program. Assuming these IDIs do not change circumstances and do not opt out as provided in Alternative B, there would be no impact on this group if the proposed fee increase contained in Alternative B were adopted. As to the remaining 2,672 small entities that had TAG eligible deposits as of the March 2009 Call Reports, they would have the opportunity to opt out of the extended TAG program if Alternative B were adopted. However, assuming these 2,672 small entities remain in the TAG program if Alternative B is adopted, the FDIC asserts that Alternative B described in the proposed rulemaking could have some impact on a substantial number of them that remain participants in the TAG program during the extension period.

As this one TLGP subcomponent is merely one of the tens if not hundreds of assorted financial backstop programs (main ones listed here), look for many such comparable notices coming out of the FDIC over the next month, as the agency realizes that the EOY 2009 maturity for the bulk of them is a joke, and the financial system will need many years with full government backing before it can do anything on its own.

In the meantime, GS stock will hit $1,000 as the employees of all competitors leave, unwilling to wait until 2020 when they get their first chance of collecting even a semi-respectable bonus.

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TGI Failure Friday: One North Carolina, One Georgia Bank, One Kansas Failure

For the 4 people who are still keeping track of the complete failure that is our banking industry, today the FDIC closed down three more banks. This is what - 40, 50, 60? banks that have failed year to date. I used to keep track few months ago. Now, not so much.

The first one:

Southern Community Bank, Fayetteville, Georgia was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Community Bank, Blairsville, Georgia, to assume all of the deposits of Southern Community Bank.

As of May 29, 2009, Southern Community Bank had total assets of $377 million and total deposits of approximately $307 million. United Community Bank paid a premium of 1 percent to acquire all of the deposits of the failed bank. In addition to assuming all of the deposits of the failed bank, United Community Bank agreed to purchase approximately $364 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million. United Community Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives

Second failure:

Cooperative Bank, Wilmington, North Carolina was closed today by the North Carolina Office of Commissioner of Banks, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First Bank, Troy, North Carolina, to assume all of the deposits of Cooperative Bank, except those from brokers.

As of May 31, 2009, Cooperative Bank had total assets of $970 million and total deposits of approximately $774 million. In addition to assuming all of the deposits of the failed bank, First Bank agreed to purchase approximately $942 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $217 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million.

The third:

First National Bank of Anthony, Anthony, Kansas was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Kansas, South Hutchinson, Kansas, to assume all of the deposits of First National Bank of Anthony.

As of March 31, 2009, First National Bank of Anthony had total assets of $156.9 million and total deposits of approximately $142.5 million.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $32.2 million.

There go another $300 million from the DIF. But at least the FDIC can celebrate 75 years of promptly shutting down banks when needed (these days, that's pretty much everyday). Sphere: Related Content

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FDIC Sold $295 Million Commercial Loans In April At 60 Cents On The Dollar

Looks like even the FDIC is flexing its perfectly inelastic supply curve in Commercial Real Estate Loans. After selling a whopping 1,328 performing and non-performing loans in March for $218 million (a 54% discount), the FDIC sold just 315 loans in April for $177 million, a 40% discount. Presumably the investors who have purchased these loans are ineligible for PPIP or else they would know they could have purchased everything at par and paid less than half in equity, resulting in much better IRRs (to themselves, not taxpayers). A novel development for this month, is that in addition to long-time fan of the FDIC loan auction process Beal Bank (LNV), now Colony Capital has also joined in the bidding fray (under Matrix Advisors LLC in the list below). It is notable that all of Colony's loan auctions were won at exactly the same bid: 67.1% of par. Something is definitely quite odd about this result. Reader feedback is welcome.

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Exclusive: Zero Hedge Receives FOIA Response On Perella-Weinberg Compensation

After several months, the FDIC has been kind enough to provide Zero Hedge readers with the information requested on Perella Weinberg's compensation (good to know bank liquidation pays a nice $4.6 million a year), and the balance on the DIF (which is somewhat stale as the FDIC recently reported that information in its quarterly update and Zero Hedge discussed the topic). Under the umbrella of the Freedom Of Information Act, I present the information as received from the FDIC unadulterated.

To all who joined Zero Hedge's campaign, you have our gratitude. In our age, transparency is of utmost importance.

FDIC FOIA/PA Log No. XX-XXXX

This e-mail is in response to your Electronic Freedom of Information Act (E-FOIA) request in which you requested, pursuant to the Freedom of Information Act (FOIA), 5 U.S.C.§552, the engagement terms related to Perella Weinberg Partners LP providing financial advisory services to the Federal Deposit Insurance Corporation (FDIC). You also requested the remaining balance of the FDIC’s Deposit Insurance Fund (DIF).

This is a link where the released compensation structure can be found:

http://www.fdic.gov/about/freedom/CompensationforPerellaWeinbergPartnersLP.pdf.

This is a link where the released contract for Perella Weinberg can be found:

http://www.fdic.gov/about/freedom/PerellaWeinbergPartnersLP.pdf.

This is a link where information about DIF trends can be found amongst the FDIC’s Quarterly Banking Profile: http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP. This is a link that can be found on the Quarterly Banking Profile – DIF trends link, above mentioned, pertaining to DIF balance and Insured Deposits: http://www2.fdic.gov/qbp/2009mar/fund.html.
This is a link where general information on the FDIC’s Deposit Insurance Assessment can be found: http://www.fdic.gov/deposit/insurance/assessments/rate_cases.html.

Inasmuch as this results in a full grant of your request, we are closing your file in our office. We hope the above has been helpful to you. Please call me directly on xxx-xxx-xxxx if we can be of further assistance.
Sincerely,


XXXXXXXXXXXXX

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FDIC's Economic Analysis

Absent a few tokes of the occasional green shoot, Richard Brown, Chief Economist at the FDIC, has put together a more or less objective presentation of the current and projected economic state. Some notable highlights:

Slide 5 - increase in arm and alt-a distress.
Slide 14 - annualized 6.1% decline in GDP Q109 due to big drop in business investment; you can bet the consumer spending fudge factor won't stay blue for long.
Slide 17 - shows more than 100% increase in loss provisions in Q408 over Q407.
Slide 18 - troubled loan %s from 91-present, and rapidly increasing currently.
Slide 19 - bank earnings dropped fastest at larger banks.
Slide 20 - credit losses increased fastest at larger banks.
Slide 24 - the nefarious 4 point plan that manifests itself every day in the equity markets.
Slide 32 - the plummeting of unused loan commitments
Slide 35 - forecasts unemployment 9.1% for 2009 and 9.7% for 2010.

Publish at Scribd or explore others:

Hat Tip Richard

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FDIC's Deposit Insurance Fund Reserve Ratio Plunges To 0.27% Of Deposits

The FDIC's Deposit Insurance Fund has plunged to an all time low of just $13 billion as of March 31, or 0.27% of $4.8 trillion in insured deposits. It is worth nothing that since March 31, 15 new banks have failed which includes the biggest one so far this year, BankUnited (which Marla has a special fondness for in her heart and will be providing some ongoing entertainment on). It is thus safe to say that the $13 billion has been spent in the past 2 months, especially since banks no longer issue debt under the TLGP (of which, nonetheless, there was $336 billion outstanding at March 31 - somehow when banks are talking about repaying TARP, their FDIC-guaranteed debt, by far the biggest crutch to the banking system, is conveniently never mentioned) and therefore no longer pay FDIC guaranteed debt issuance associated fees. For many more thoughts on this phenomenon, go here.



Also, DIF-Insured deposits have hit an all time record high of $4.8 trillion, an increase of $90 billion from December 31 as depositors have been seeking a safe haven from the market in Q1. It is unknown if they would have done so, had they known their "insured" deposits will cover only the first 0.27% of depositors if there is another bank failure tsunami. As there is only one more month left in Q2 it will be curious to see it there will be a rotation out of deposits into investments at June 30, concurrent with the time we will know what the current level on the DIF is. Of course, as this data will be available some time in September, by then it may be completely worthless as one would imagine at some point the mystical futures buying force, end of month convenient fund deleveraging, or whatever else you want to call it, will have finally exhausted its market pulling strength.


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Cramer Bair'ed

Sheila Bair on Cramer today. Instead of pandering her flawed policies in front of a small (if any) cable audience, with such pearls as "insured depositors have nothing to worry about", maybe Ms. Bair can finally get back to Zero Hedge in its FOIA request attempting to obtain some/any information on just what is the compensation/fee structure for FDIC's advisor, and the real man behind the curtain, Perella Weinberg. How is this private investment bank/hedge fund, whose succumbing to Ratner's bullying attempts recently was the main reason for the non-Tarp lenders to abandon their fight to block the Chrysler 363 asset sale, incentivized to advise Sheila and her henchmen when it comes to deciding which bank(s) to close. And not just that, but one would be interested in finding out just what role did Perella Weinberg play in the negotiations between Carlyle, Blackstone and Ross when they acquired BankUntied, and, more relevantly, what fee did P-W get out of that deal.

Please Ms. Bair - at least a flat out refusal to our FOIA request would be sufficient. In the meantime, if readers would like to join this effort, the FDIC's FOIA submission page is here.

Listen to the interview below and focus on the language about economists and examiners (~2 minutes into the interview): these are the people on whom the fate of the financial system lies.
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FDIC Sold $470 Million Commercial Loans In March At 46.4 Cents On The Dollar

When Zero Hedge previously demonstrated the results of FDIC commercial loan auctions and the discount the Federal Deposit Insurance Corporation was willing to take in order to offload commercial loans (both non-performing and performing) from its books, the result was very startling, specifically when considered in the context of the vocal endorsement Ms. Bair had given to the PPIP's Legacy Loan program and the expected commercial loan clearing levels in the 80s and 90s. At that time Zero Hedge concluded that it was very hypocritical for the FDIC to solicit banks in offloading loans, and for hedge funds to buy them at out of market prices (especially with taxpayer-subsidized guarantees for hedge fund purchases, compliments of the administration, Geithner and Bair).

The facts: in April, the average auction clearing price on the 331 loans the FDIC sold in January and February was 49.3%. In March, the number of loans FDIC sold in various auctions increased almost four-fold to 1,328, for a total of $470 million in book values of sales, with the average price dropping even more: the latest being at 46.4%. So much for a stabilization in the commercial real estate market.



And for those who claim that this price is distorted because it includes several non-performing loans, well - we have a control for that too. Compiling just the data from performing loans gives a great auction clearing price boost to... 51%.

Yes, the same FDIC which is advocating using taxpayer money to endorse and guarantee legacy loan sales as part of the PPIP in the 80/90 cents on the dollar range, continues selling performing commercial loans at about 50% off their book value. Ms. Bair's hypocrisy continues to amaze. Sphere: Related Content

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Senate Expands FDIC Credit Line To $100 Billion

As had been widely expected, today (a day before the stress test results finally stop leaking, compliments of the securities and exchange commission) the senate passed a measure approving the expansion of the credit line from the Treasury to the FDIC to $100 billion, from $30 billion previously. The vote passed 91 to 5. In addition, the FDIC will now have half a trillion credit limit that will expire by the end of 2010. As the senate has firmly decided that dollars are now not worth even their weight in zero-ply toilet paper, it makes sense to see just how quickly the FDIC has managed to eat through the Deposit Insurance Fund, of which it had roughly $19 billion at the end of 2008, and now has a couple of pennies above zero, which any way one looks at it is less than the statutory DIF reserve minimum of 1.15% of insured deposits (indicatively, the minimum balance in the DIF (at least according to existing laws: once can imagine these will be promptly "adjusted") should be $54 billion, or 1.15% of the $4.7 trillion in insured deposits. Once it falls below that amount the FDIC must come up with a restoration plan to raise the DIF to that level. Good luck with that) .

And all this was accomplished in a mere four months.

Oh, and by the way, advisor for the FDIC, in case you missed it before, is Perella Weinberg
(here is the link for the ongoing Zero Hedge FDIC-Perella Weinberg compensation FOIA initiative).



hat tip Guillermo Sphere: Related Content

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White House Claims Head Of White & Case Restructuring Group Lied

In a story becoming more bizarre by the minute, ABCNews has now picked up on the Perella Weinberg scent with some new twists. According to ABC, White House deputy press secretary Bill Burton claims that the allegations by Tom Lauria, global head of the Financial Restructuring and Insolvency at White & Case are "completely untrue". As Zero Hedge already disclosed, Perella Weinberg was previously a client of White & Case, however, the firm run by former head of M&A at Morgan Stanley Joe Perella (where incidentally Steve Rattner was head of the Communications group until 1989), decided to fire the law firm after developments unknown, and in a radio show, Tom Lauria had this to say about the White House's alleged strongarming tactics:

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."

The White House has now stepped in and claims that this story is patently false:

"The charge is completely untrue," said White House deputy press secretary Bill Burton, "and there's obviously no evidence to suggest that this happened in any way."

What is more strange is that now Perella Weinberg itself is claiming Lauria's story misrepresented the facts:

"A Perella Weinberg Partners spokesperson told ABC News on Sunday that “The firm denies Mr. Lauria’s account of events.” The spokesperson would not elaborate."

What is strangest is that Lauria would stake his career and reputation on the line by stating on the record the facts previously disclosed. As such his downside is much bigger than that of Mr. Burton or of the PW's spokesperson, as they effectively side with the Obama's side of the story.

Granted there could be even more to this story than meets the eye, thanks to some keen observations by our friends at Finem Respice.

Ultimately, this will be a very interesting development, because without factual backing, Tom Lauria's career is now on the line, as he has taken on not just the administration but his very own, former client. The bottom line here is that someone is lying, and if any further facts emerge to substantiate White & Case's position, it could prove to be a massive PR blow to both the White House and the FDIC's advisor, Perella Weinberg.

The full statement by Perella Weinberg is presented below:

Suggestions have been made that the Perella Weinberg Partners Xerion Fund changed its stance on the Chrysler restructuring due to pressure from White House officials. This is incorrect. The decision to accept and support the proposed deal was made by the Xerion Fund after reflecting carefully on the statement of the President when announcing Chrysler’s bankruptcy filing. In considering the President’s words and exercising our best investment judgment, we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.

We have a very specific mandate from our investors, and that is to carefully weigh investment risks and rewards. It is not our investment mandate to pursue political or risky legal campaigns with our investors’ money. This was our assessment of investment risk and reward, nothing else.



While we did and still do believe that the lenders would be justified in pressing their objections under conventional bankruptcy law principles, we believe a settlement would now be in the best interests of all parties in the context of avoiding a drawn out contested bankruptcy litigation proceeding, and we encourage our colleagues in the loan syndicate to pursue this immediately.”

Lastly, should it be at all odd, that Mr. Arbess, fund manager of Perella Weinberg's Xerion, which is at the heart of this whole Chrysler fiasco, was not only a Partner, but also Head of Global Privatization at ... White & Case.

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The White House Threatened To Destroy Perella Weinberg's Reputation

Update - please see additional FOIA information at end of post.

In an interview of momentous importance, WJR's Frank Beckmann interviews Tom Lauria, the Head of Restructuring at top five law firm White & Case, in which the lawyer, who represents Chrysler hold-out hedge funds Stairway Capital and Oppenheimer Funds, discusses on the record the amazing treatment by the White House of Perella Weinberg, which initially had been a transaction hold out but after threats by the White House (not my words) was forced to drop their objection and go with the administration. Says Lauria:

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."

In the clip below, fast forward to the two minute mark, where the Obama administration's negotiating tactics become very, very clear.

What is very odd is that Perella Weinberg could possibly have veered away from the administration's path in the first place: Zero Hedge readers know that P-W is the very firm advising the rapidly sinking FDIC "on transactions and strategies to stabilize the banking system, and also on the proper way to dispose failed institutions and how to handle delinquent securities assumed from banks, as well as the creation of the aggregator bank."

This leads to the conclusion that this was really the work of one Dan Arbess, who runs the recently acquired by P-W, Xerion Capital, but nonetheless does not explain the lack of strategic integration at this most critical of advisors to Sheila Bair, and by implication the U.S. administration. How it is possible that one's core advisor would go against its client, even if offset by a Chinese Wall, is likely the big story here, and speaks volumes about the chaos behind the scenes currently occurring with regard to Wall Street's sentiment for the ruling administration.

Incidentally, Zero Hedge is considering launching a FOIA to Ms. Sheila Bair to disclose the compensation structure for Perella Weinberg as it continues to advise the FDIC on the "proper" shuttering and liquidation of bank after bank. After all, we have already seen 31 bank failures for 2009, a number that will likely hit the 100s, and it is every taxpayer's right to understand the motivations behind Perella-Weinberg's recommendations to the FDIC and to the White House, especially ahead of next week, when the stress test results could potentially lead to the closure of some of the "too big to fail" systematically important financial institutions.

The full interview with Tom Lauria below is a must hear for everyone as it discloses not only the administration's strong arming tactics in black and white, but also discloses some other critical facts that the president on his regular TV appearances has failed to mention such as:

- First lien holders were willing to accept a 50% discount on their positions, however the 71% demanded by the administration was seen as too much.
- The cash going to Junior claims (creditors below the first liens) will be between $10 and $20 billion, a number which in practice should satisfy a par recovery for the 1st liens if the Absolute Priority Rule was actually withheld.
- Among the creditors are not just vulturous hedge funds but "pensioners, teachers, credit unions, college endowments, retirement plans, and personal retirement accounts."

In conclusion, Lauria summarizes the developing Chryslerf#%k best:

"The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?"

Update: Zero Hedge urges our readers to click on the following link and submit a FOIA to the FDIC with regard to the abovementioned Perella Weinberg compensation matter. While one request will likely be ignored, as will ten or a hundred, if there are thousands of FOIA petitions, the FDIC may see it as their civic duty to provide the requested information. While you are at it, you may also request information on the remaining balance under the FDIC's Deposit Insurance Fund.

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Hat Tip Steve Sphere: Related Content

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May Day Friday Bank Failure Count Up

The first bank failure to hit the FDIC website (this is #30 for 2009) : Silverton Bank, National Association of Atlanta, Georgia. Seeing how this failure was massive by TGI Bank Failure Friday terms, having $4.1 billion in assets, and $3.3 billion in deposits, the FDIC was unable to find an appropriate buyer (with its usual backstop) and instead had to create an intermediary organization out of thin air to allow the receivership process, called the Silverton Bridge Bank. The FDIC had this to say about the bridge bank:

The creation of the bridge bank allows the client banks to maintain their correspondent banking relationship with the least amount of disruption. The FDIC will operate Silverton Bridge Bank, N.A., to allow preexisting marketing efforts for the bank to continue.

There goes another $3.3 billion that previously was part of the increasingly minuscule (if not currently negative) Deposit Insurance Fund. Maybe Ms. Sheila Bair can provide her employer (the U.S. taxpayers) with an update of just what the current status of the DIF is these days: been a while since we got one of those.

Bank #2 is Citizens Community Bank of Ridgewood, NJ. The FDIC estimates that the cost to the DIF will be a mere $18.1 million. The bank had $45.1 million of total assets and $43.7 million in total deposits.

Citizens Community Bank, Ridgewood, New Jersey, was closed today by the New Jersey Department of Banking and Insurance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with North Jersey Community Bank, Englewood Cliffs, New Jersey, to assume all of the deposits of Citizens Community Bank.

The failed bank's sole office will reopen on Monday as a branch of North Jersey Community Bank. Depositors of Citizens Community Bank will automatically become depositors of the assuming bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until North Jersey Community Bank can fully integrate the deposit records of Citizens Community Bank.

Bank #3 is America West Bank of Layton, Utah. The FDIC estimates that the cost to the DIF will be a mere $119.4 million. The bank had $299.4 million of total assets and $284.1 million in total deposits.

America West Bank, Layton, Utah, was closed today by the Utah Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Cache Valley Bank, Logan, Utah, to assume all of the deposits of America West.

The failed bank's three offices will reopen on Monday as branches of Cache Valley Bank. Depositors of America West Bank will automatically become depositors of the assuming bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches.

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Washington Mutual Sues JPMorgan To Recover $4 Billion In Deposits

WaMu has had enough and has filed a suit against JPM, trying to recover its $4 billion in deposits. WaMu, claims the money is being held by its former subsidiary, Washington Mutual Bank, which JPMorgan bought for $1.9 billion last year (not a bad deal if we may say so ourselves: you buy $1 for less than 50 cents on the dollar, with the FDIC guaranteeing any potential losses on the transaction). Seattle-based Washington Mutual has been trying to recover the money since filing for bankruptcy in September.

“JPMC has no basis to withhold the debtors’ funds and the funds are accruing interest at a rate significantly less than what the Debtors’ estates would otherwise be earning,” Washington Mutual said in the court filing attached below.

JPMorgan has declined to return the money, saying it may have a claim on the funds itself and that it cannot give Washington Mutual the money without receiving a so-called set-off right from the bankruptcy court, according to court papers filed by WaMu. The set-off would ensure JPMorgan is paid for any claims it has against WaMu.

Not only that, but the stealthy Sheila Bair has said it also may have a claim on the cash, at the expense of WaMu bondholders, who state that the withdrawal would be unfair without forcing WaMy to prove it owns the cash.

Bondholders have our sincerest sympathies and condolences.

(Check out page 24, not a bad balance to see in your bank statement).

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Latest In The Bank Failure List: 4 Banks, 1 Credit Union

Bank failures #26, 27, 28 and 29 for the year were American Southern Bank of Kennesaw, Georgia, Michigan Heritage Bank of Farmington Hills, First Bank of Beverly Hills and First Bank of Idaho of Ketchum, Idaho. The cost to the FDIC from the three failures will be $48.7, $50 million, $394 and $113 million, respectively. As the economy's green shoots are hyped by the chatterboxes on TV and the administration, in one week the FDIC's Deposit Insurance Fund has lost over $600 million on four bank bailouts. As the DIF only had $19 billion at December 31, Zero Hedge would wager there is little to no money left to insure systemic deposits, especially with bank neet need to use the TLPG any longer, thus depriving the FDIC of a much needed source of revenue.

Additionally on the bank failure front, $1.6 billion Eastern Financial Florida Credit Union was placed in NCUA conservatorship.

April 24, 2009, Alexandria, Va. -- The National Credit Union Administration (NCUA) today assumed control of the operations of Eastern Financial Florida Credit Union, a state-chartered, federally insured credit union headquartered in Miramar, Florida.

Eastern Financial Florida Credit Union was originally chartered in 1937 and today serves Broward, Miami-Dade, Palm Beach, Hillsborough, Pinellas counties and the Jacksonville area. The credit union has approximately $1.6 billion in assets and just over 200,000 members.

Hopefully any investors who were stupid enough to have deposits for more than $250,000 in either of the institutions managed to play the short squeeze and make up for the losses. Also, they are all likely very convinced that the economy is abound to rebound. Sphere: Related Content

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FDIC Publishes Public Comments On The Legacy Loan Program

The list is enough to provide enjoyable weekend long reading. Easily some of the funniest stuff seen in a long time, yet somehow it makes its way straight to the FDIC's website. One wonders if all these entities were aware their e-mails would end up for public viewing and amusement, and if so whether they would have submitted them in the first place.

Among the more serious funds/companies/individuals are:

- Investcorp's own Christopher Hoeffel, president of the Commercial Mortgage Securities Association and likely conflicted beyond repair.
- Mason Capital (Neale X. Trangucci, formerly of bankrupt WHX fame)
- Rolfe Winkler of OptionARMageddon
- Marathon Asset Management
- Osprey
- Chandler Management
- Clark Street Management
- Ramius
- FirstBank Holding Company
- Capital Legacy Partners
- Asset Loan Solutions
- Snowball Partners
- Hovnanian
- Stifel Nicolaus

I would like to highlight the following fabulous e-mails which collectively encapsulate the feelings of Zero Hedge, and don't hide their warm feelings toward miss Sheila Bair. Among these, the letter by Mr. Benn Dover III's is a truly inspiring missive.

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Hat Tip David

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Exposing The Utter Hypocrisy Of The FDIC, And How Andy Beal Is Making A Killing Off It

For all those who feel like punching their monitor or TV every time the administration says that the legacy loan program is fair and equitable at a transaction price in the 80-90 cent ballpark, we have some news for you (that will likely make the half life of said monitor or TV even shorter).

But first, there has been a lot of speculation about where banks have marked their commercial loan portfolios. Zero Hedge had previously discovered and disclosed interpretative data from Goldman, which concluded that the major banks were still stuck in a fairytale world where these loans were marked in the 90+ ballpark, a far, far cry from where comparable loans would clear in the market. Of course, FDIC's head Sheila Bair (who many WaMu shareholders lately do not feel too hot about) had some interpretative voodoo of her own, claiming the bid offer disconnect is purely due to a lack of liquidity and access to financing:

"It has been clear for some time that troubled loans and securities have depressed market perceptions of banks and impeded new lending. Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing. The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets. While there are inherent challenges to implementing a program of this magnitude quickly, the framework announced today provides the foundation upon which the FDIC will begin to build immediately."

So it came as a big surprise that none other than the FDIC keeps a track of where commercial loans clear in its own internal auctions. In a relatively obscure part of the FDIC's website, there lies a little gem of disclosure, which exposes all the rhetoric by Sheila Bair and by other members of the administration as hypocrisy on steroids. We bring you: FDIC's closed loan sales database. Zero Hedge took the liberty of compiling some of the data for the benefit of our readers: we picked a data sort of all closed commercial loan auctions from January 1, 2009 to February 28, 2009, to see just at what level these would close. Of course, we highly recommend our readers recreate these results.
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The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That's right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.



Curiously, the FDIC also discloses the winning bidders. The surprising recurring result: a little known (but deserving much greater attention) company known as Beal Bank (and its LNV Corporation subsidiary). In the first two months of the year alone, Beal Bank, and more specifically its owner Andy Beal, has won $73 million face value of auctions, for a price of $43 million- a clearing price of 59%. Another way of looking at it is that Beal accounts for 35% of all FDIC auctions.

Just who is Andy Beal, aside from a prolific and profitable poker-playing, college-dropout of course? A great question, which Forbes goes into great detail answering this weekend. We paraphrase the key points from Forbes:

Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.

It is amusing that Beal Bank, which is not large enough to qualify for the FDIC's zombie bank life-support program known as TLGP, is beating the FDIC at its own game, gobbling up assets (at fair market prices, which is what auction outcomes are by definition). Beal is such a non-mainstream individual that Project Zero will hold a honorary bunk in his favor, (he will have to decide who gets top with Chuck Bowsher) until such time as he decides to stand outside ZH headquarters for 24 hours to gain admission:

It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000.

However, the main reason why Beal is prophetic beyond his years is the following:

He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

It is a fitting conclusion that Beal himself is the winning bidder in FDIC's commercial loan auctions (which no other major bank with a $ trillion+ balance sheet has any interest in participating in - why is this if the loans are worth 90 cents as Citi et al have them market internally?), and thus the true market test of what all these toxic legacy loans are really worth. Zero Hedge wholeheartedly agrees with Beal that the CRE situation is headed for a cliff at 120 mph, and that no matter how much hypocritical posturing and rhetoric the administration spouts, or how many more trillions in debt the U.S. incurs to revive the financial zombie on the morgue dissection table, there is nothing at this point that can be done to change the final outcome.

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Is the FDIC About To Turn The Tables On The PPIP

After the PPIP seemed like a done deal with its legacy loan and legacy security purchasing aspects already virtually set in stone, the FDIC surreptitiously slipped this Request For Comments (RFC) on its website. Two of the proposed questions submitted by the FDIC bear particular attention:

10. Would it be preferable for the selling bank to take a note from the PPIF in exchange for the pool of loans and other assets that it sells? Alternatively, what would be the advantages and disadvantages of structuring the program so that the PPIF issues debt publicly in order to pay cash to the selling bank? Would a public issuance of debt by the PPIF limit its flexibility compared to the issuance of a note to a selling bank?

and

2. Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP?

Assuming there is sufficient endorsing response on point 10, the PPIP, as currently structured may end up getting turned around on its head. Instead of providing outright guarantees to the non recourse loans that will be used to purchase legacy loans (thus benefitting "private" investors such as PIMCO), the FDIC may end up issuing FDIC-backed notes directly to the banks that are selling loans. The presumption is that by exchanging illiquid loans into FDIC guarantee debt, the selling banks would "strengthen their balance sheets." The FDIC notes would carry higher ratings and may also be eligible for use as collateral for Federal Reserve loan facilities (thus allowing these toxic assets to be used as leverage). In exchange for this principal risk, the banks would get an equity upside component themselves. According to Jim Wigand, FDIC deputy director for resolutions and receiverships, "One option is for the seller to retain an equity interest as a part of the consideration for the sale."

A logical push back to this proposal was voiced by Jones Day partner Chip MacDonald: “[Banks] may need the liquidity of those notes, and it’s not clear there will be a meaningful secondary market for them so banks could sell them for cash."

Furthermore, the potential abuses arising from conflicts of interest, as the banks would take positions on both sides of the transaction, could be dramatic, although likely to have little impact in the FDIC's ultimate decision which has long since lost any credibility of a fair and equitable arbiter.

Additionally, point 2 opens up the potential for banks to endorse the FDIC's support of virtually any security to be eligible for taxpayer subsidies: if this is not nationalization in anything but name, we would refer to our readers to point out how better to call it.

Of course, the parties most opposed to this would be the PIMROCKs of the world, who will thus be unable to participate via a cheap 12x leveraged equity position in the legacy loans.

Ultimately, this whole argument may be moot thanks to the FASB's earlier conversion of all
"assets" to Level 3 equivalency status, and thus the RFC may just be a way out for the FDIC to jettison the whole legacy loan program after receiving "too many divergent opinions."

Additionally points 14 and 17 (see below) are just amusing in their entirety, so I present them without comment.

The entire RFC is presented in its entirety below, and there is an April 10th deadline for comments. We encourage our non-braindead (yet) readers to submit what they really think about the legacy loan program directly to the FDIC.

******

II. Request for Comment

The FDIC is requesting comment from interested parties on all aspects of the proposed LLP. In particular it has formulated the following questions for interested parties to consider:

1. Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP?

2. Should the initial investors be permitted to pledge, sell or transfer their interests in the PPIF? If so, how should the FDIC ensure that subsequent investors meet the program's criteria for investors?

3. What is the appropriate percentage of government equity participation which will maximize returns for taxpayers while assuring integrity in the pricing by private investors? How would a higher investment percentage on the part of the government impact private investment in PPIFs? Should the amount of the government's investment depend on the type of portfolio?

4. Is there any reason that investors' identities should not be made publicly available?

5. How can the FDIC best encourage a broad and diverse range of investment participation? How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the PPIF?

6. What type of auction process facilitates the broadest investor participation? Should we require investors to bid on the entire equity stake of a PPIF, or should we allow investors to bid on partial stakes in a PPIF? If the latter, would a Dutch auction process or some other structure provide the best mechanism for bridging the potential gap between what investors might bid and recoverable value? If multiple investors are allowed to bid through a Dutch auction, or similar process, how should asset management control be determined?

7. What priorities (i.e., types of assets) should the FDIC consider in deciding which pools to set for the initial PPIF auctions?

8. What are the optimal size and characteristics of a pool for a PPIF?

9. What parameters of the note and its rate structure would be essential for a potential private capital investor to know at the time of the equity auction to provide equity?

10. Would it be preferable for the selling bank to take a note from the PPIF in exchange for the pool of loans and other assets that it sells? Alternatively, what would be the advantages and disadvantages of structuring the program so that the PPIF issues debt publicly in order to pay cash to the selling bank? Would a public issuance of debt by the PPIF limit its flexibility compared to the issuance of a note to a selling bank?

11. In return for its guarantee of the debt of the PPIF, the FDIC will be paid an annual fee based on the amount of debt outstanding. Should the guarantee fee be adjusted based on the risk characteristics of the underlying pool or other criteria?

12. Should the program include provisions under which the government would increase its participation in any investment returns that exceed a specified trigger level? If so, what would be the appropriate level and how should that participation be structured?

13. Should the program permit multiple selling banks to pool assets for sale? If so, what constraints should be applied to such pooling arrangements? How can the PPIF structure equitably accommodate participation by smaller institutions? Under what process would proceeds be allocated to selling banks if they pool assets?

14. What are the potential conflicts which could arise among LLP participants? What structural arrangements and safeguards should the FDIC put into place to address or mitigate those concerns?

15. What should the relative role of the government and private sector be in the selection and oversight of asset managers? How can the FDIC most effectively oversee asset management to protect the government's investment, while providing flexibility for working assets in a way which promotes profitability for both public and private investors?

16. How should on-going servicing requirements of underlying assets be sold to a PPIF and paid for? Should value be separately attributed to control of the servicing rights?

17. Should data used by the independent valuation consultant, as well as results of such consultant's analysis, be made available to potential bidders? Should it be made available to potential sellers prior to their decision to submit assets to bid?

Comments on the LLP may be submitted until April 10, 2009.

You may submit comments by any of the following methods:
E-mail: LLPComments@FDIC.gov. Include "Legacy Loans Program" in the subject line of the message.

Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. (EDT). Sphere: Related Content

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Is FDIC's Plan To Prop Up DIF In Jeopardy?

In a stark demonstration of how U.S. banks can potentially circumvent the FDIC's TLGP program and the agency's hopes of raising DIF reserves by charging new and higher fees, JP Morgan today successfully raised 2 billion euros in 5 year unsecured paper. The bonds priced at 375 over LIBOR. This was only the first debt issue for a U.S. bank outside of the TLGP program since the Lehman default in September, and a third for financial issuers, with the only other two examples being GS' 10 year bond pricing January 29 and a 30 year GECC bond pricing January 6, both due to term-paper demand. The JPM note, however, was not based on term demand as it only 1.25 years longer than the current overriding TLGP ultimate guarantee maturity of December 31, 2012.

As a reference point, JPM's 2.2% notes of June 2012 trade at LIBOR + 23.75. When one factors the 100 bps FDIC fee, the total cost to an issuer for identically comparable TLGP debt would come to 124 bps. The implication is that JPM is willing to pay 251 bps of additional interest to a) extend the maturity by less than 2 years and b) gradually shift away from having its new capital issues done under the TLGP, and thus the government's (with its populist constituency) umbrella.

As Zero Hedge had earlier speculated, the incremental costs associated with the TLGP program will make seeking alternative avenues to FDIC-backed issues much more attractive, especially in the eurodollar market. Furthermore, as next up on every bank's agenda is putting as much space between itself (as a private enterprise) and the government (just look at recent headlines disclosing the desire of banks such as GS and BAC to repay TARP as soon as possible), the refinancing of TLGP issues with unsecured paper will become the next prerogative, especially since the market seems to have forgotten that just a month ago the prevailing paradigm was that unsecured debt would see 25% haircuts.

This may have the unintended consequence of dramatically reducing the projected fees the FDIC had hoped to generate, as banks cease utilizing the TLGP for new capital raises. Ironically, by making the banking sector (seem) healthier, the administration has lost one of the major cash funding mechanisms for the replenishment of the Deposit Insurance Fund, putting the FDIC even more in bed with the Treasury, to whose dollar printing presses it will now have to look as the primary source of cash funding. Sphere: Related Content

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