The Federal Deposit Insurance Corp. (FDIC) plans to auction more than $1 billion in assets seized from failed banks, and that’s not good news for other banks around the country.
That’s because some of them participated in the loans being sold and thus would have to take hefty writedowns to account for the reduced prices at which the loans are sold, Bloomberg reports.
“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” Robert Reynolds, an Alabama lawyer, told Bloomberg.
He represents 25 banks who participated in a loan to the W Hotel in Atlanta that’s slated to be sold.
“Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”
A total of 140 banks failed last year, and FDIC Chairman Sheila Bair said the number may be higher this year. It stood at 26 as of March 6.
The agency said on Feb. 23 that 702 banks were on its “problem” list as of Dec. 31, up from 552 at the end of the third quarter. The FDIC’s insurance fund had a deficit of $20.9 billion at the end of the year.
Of the $41 billion in assets the FDIC took over from failed banks as of Jan. 31, $15.6 billion are real estate loans and about 4 percent of those include other lenders, FDIC spokesman Andrew Gray told Bloomberg.
“This whole thing is a mess waiting to happen across the country,” Geoffrey Miller, a New York University securities law professor told Bloomberg.
Not all banks are in trouble.
Jeffery Harte, managing director of equity research at Sandler O’Neill, told CNBC investors would do well to buy Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley.
Meanwhile, Bair said a low interest rate policy is "clearly appropriate" due to the still struggling economy. She also expressed frustration that banks are not doing enough to get credit flowing, Reuters reported.
She said credit-worthy borrowers are still not getting enough access to loans, and more needs to be done. "A policy of low interest rates is clearly appropriate given the struggling economy," Bair said in remarks to the National Association for Business Economics.
The Federal Reserve has vowed to keep borrowing costs ultra low for an "extended period." Most big banks that do business with the U.S. central bank believe it will raise the benchmark rate this year from the current zero, a Reuters poll showed.
She said a public spotlight needs to be shined on banks for having pulled back too far on extending credit.
Ramping up small business lending as a way to jump-start economic growth is a key policy initiative of the Obama administration.
U.S. bank regulators have repeatedly issued advisory notes to banks, urging them to extend prudent loans, but Bair said they should stop short of mandating the activity.
"If you cross a line and get into a situation where regulators are starting to order banks to lend, the history on that isn't good," she said.
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