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As Buyers Vanish, FDIC Urges Pension Funds To Invest In Failed Banks

 March 08, 2010 04:09 PM


The Federal Deposit Insurance Corp., in an attempt to attract more buyers for failed banks, is urging public retirement funds to acquire all or part of failed lenders, in order to bolster the banking system.

"The FDIC is constantly looking at structures where we can get the greatest opportunity to tap into capital that we have not had the success reaching through previous disposition methods," FDIC spokeswoman Michele Heller said in an e-mailed statement. "We welcome and work with all investors."

Though current rules don't block pension funds from acquiring failed banks, they have typically chosen to invest through private-equity firms using limited partnerships, which gives pension funds little to no control over the day-to-day management of the investments. Moreover, they also pay management fees levied on the amount of money committed as well as a percentage of any profit. However, FDIC's offer to pension funds to directly invest in such banks would help these funds cut fees for private equity managers. Moreover, the move will also help FDIC in getting better prices for distressed assets. Pension funds, whose 100 largest members manage $2.4 trillion, could provide capital to acquire deposits and outstanding loans from collapsed banks, according to the people.

Few public retirement funds have shown keen interest in FDIC's offer. In a presentation at Oregon's retirement fund, Jay Fewel, a senior investment officer at the Oregon State Treasury, said that the fund may contribute $100 million. New Jersey's fund may also participate, said Orin Kramer, chairman of New Jersey's State Investment Council. "We've been examining a broad range of alternatives to take advantage of what I believe are attractive transactions coming out of the FDIC," Kramer said.

Though the economy is showing signs of a gradual recovery, increasing loan losses on residential and commercial real estate continue to take their toll on small banks.

In 2010, 26 banks have been closed so far, compared to 140 in 2009, 25 in 2008 and 3 in 2007. The FDIC holds about $40 billion of assets from seized banks and expects to gather more as institutions continue to collapse after the worst U.S. recession and real-estate slump since the Great Depression, according to agency officials. Real estate loans at U.S. banks that are at least 90 days overdue or that are expected to default almost doubled in 12 months to 7.1 percent, according to December FDIC data. Non- performing loans for construction and development surged to 16 percent from 8.6 percent.

The number of U.S.-insured banking institutions on the government's "Problem List" jumped more than a quarter percent to 702 at the end of the fourth quarter, compared to the previous quarter, and total assets of these lenders grew 16 percent to $402.8 billion, according to the FDIC.

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