Raft of Deals for Failed Banks Puts U.S. on Hook for Billions

WSJ ^ | 8/31/09

[FromLori]

The biggest spur to deal-making among banks isn't private-equity cash or foreign investors. It is the federal government.

To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.

Through more than 50 deals known as "loss shares," the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk.

As financial markets heal and the economy appears to be pulling out of recession, the federal government is shifting from crisis to cleanup mode. But as the loss-share deals show, its potential financial burden isn't receding. So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements.

The practice is largely a response to the number of bank failures of the past 18 months, which has stretched the FDIC's financial and logistical resources. The FDIC had just $10.4 billion in its deposit-insurance fund at the end of June, down from more than $50 billion last year. The agency said Thursday it had 416 banks on its "problem" list at the end of the second quarter, which means the list of banks at a higher risk of insolvency has been growing.

[FromLori]

Remember the U.S. in the U.S. Government is US!

[CPT Clay]

Raft of deals///stop it already!!!!!

[RC2]

Look to the Federal Reserve. The US will loan money to the Fed, then they will borrow it back and pay the Federal Reserve interest. It’s a money game to make money for the Federal Reserve.