August 21, 2009

Economic Outlook: Banks for sale

While the U.S. economic recovery appears firmer day by day, there is that nagging feeling something may have been left behind -- toxic assets, perhaps.

Indeed, the buildup of failed banks this year shows something is still amiss in the financial sector, as toxic assets continue to haunt the industry. Mid-sized or regional banks are especially vulnerable, but occasionally a failure will earn national attention, like the failure of Colonial Bank a week ago -- the sixth largest U.S. bank failure on record.

This year, 77 banks have failed, putting pressure on the FDIC, which backs consumer deposits and act as the scrapyard for banks that go belly up.

Like any scrapyard, the FDIC can break down the assets that come under its control and find buyers for the parts and pieces.

But the FDIC also has an obligation to see that the new owner can make a go of it, so the parts and pieces don't don't come back into the scrapyard again. (Not just any shady character can buy here.)

Finding buyers has been problem, however. Of the 77 banks that failed this year, the regulator has been unable to sell eight of them, The New York Times reported Friday.

As such, the FDIC board is now reviewing steps to make it easier for private equities to buy insolvent banks.

Regulators announced in July that failed banks could be broken down into good and bad assets, putting the bad loans up for sale at auctions in which the government absorbs a portion of the risk.

At this point, they are looking hard at as many solutions as possible, Frederick Cannon, chief equity analyst at Keefe, Bruyette & Woods, told the Times. When you have this many bad loans at these banks, there are no easy fixes.

In fact, with increasing frequency, the FDIC is offering deals to limit risks for those who purchase failed banks, offering to share in the losses with two-thirds of the banks sold this year, the Times said.

Sources say the FDIC is reviewing a series of proposals to loosen restrictions or toss in guarantees to entice buyers to their bank auctions.

One proposal could end up relaxing mandates that equity firms support the subsidiaries of the banks they buy, The Wall Street Journal reported. Another would lower the capital cushion requirements for equity firms.

In market movement Friday, the recently volatile Shanghai Composite index gained 1.69 percent. The Nikkei 225 in Japan closed down 1.4 percent. In Australia, the S&P/ASX dropped 1.99 percent.

In midday trading in Europe, the FTSE 100 index gained 1.16 percent. The DAX 30 in Germany rose 1.59 percent, while the CAC 40 in France gained 1.47 percent. The broader DJStoxx 50 rose 1.16 percent.