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October 13, 2010

WSJ reports: CDOs a problem for FDIC

FDIC now owns more than 250 collateralized debt obligations that had been bought by small and now defunct banks, and it's concerned about potential write-offs, according to a Wall Street Journal article Tuesday.

"The agency hopes to auction off any CDOs that have value this summer. If it can't unload them, the FDIC could be forced to write off their value, saddling taxpayers with the losses," according to the article ("Toxic CEOs Beset FDIC as Banks Fail").

The CDOs held by the FDIC have a book value of about $400 million, the article states, but a staffer was quoted saying many of them "will have little or no market value."

These are the same type of investment that has caused the Securities and Exchange Commission to file suit against Goldman Sachs and are one of the key instruments some lawmakers want to put under regulatory scrutiny through S. 3217, the Restoring American Financial Stability Act.

According to Tuesday's WSJ article, some of the previously bank-owned CDOs were "trust preferred securities," which reportedly have contributed to the failures of some 200 banks since early 2009. "More than 1,500 banks issued such securities between 2000 and 2008 after regulators ruled that they could be counted as capital, making their balance sheets appear healthier," it states.

The failure of Eastern Financial Florida CU was reportedly driven in large part by its investments in CDOs; the instruments fell sharply in value shortly following their purchase.

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