From the Times article: “[FDIC] officials announced that they had reached a deal to sell $1.3 billion in mortgages from Franklin Bank, a Houston-based lender that failed last November and was taken over by the F.D.I.C.”
Konczal, of course, also caught this:
“The first argument is that it would take banks that were otherwise healthy and allow them to start lending again in the middle of a credit crunch. We taxpayers pay to help unload these loans onto other private markets, so that the bank can start lending again.
“But as financeguy points out, the bank in question, Franklin Bank, is dead. FDIC took it over around a year ago, with its balance sheet deep in the red and after losing double digits in loans since 2007. It took a huge gamble in the real estate market, and it got destroyed. This isn’t an otherwise healthy bank with one bad asset on it.”
But I think he is altogether too cool about this. Let me try for a little more indignation. Our government is providing large subsidies to private investors to buy toxic assets. The only possible justification for these subsidies is that they are necessary to restore health to the banking system, by taking toxic assets off the balance sheets of banks. But these toxic assets are already the property of the U.S. government. This means that the government owns 100% of the upside and 100% of the downside on those assets.
Or at least it did until last week. Then it gave half the upside to an investment fund – “Residential Credit Solutions of Fort Worth, a three-year-old company founded by Dennis Stowe, a veteran of the subprime mortgage industry” – and kept all of the downside to itself. What could they possibly have been thinking?
(And wasn’t there supposed to be an auction in there somewhere? The Times story doesn’t mention one (although that doesn’t mean there wasn’t one). Without an auction, how do we know this isn’t more of a giveaway than it already looks like?)
By James Kwak