The Federal Deposit Insurance Corporation, which insures deposits and manages failed banks placed in receivership, among other things, has received toxic collateralized debt obligations (CDOs) with a “book value” of over $400 million from approximately two dozen failed banks around the country. In this case, “book value” means cost basis. In reality, the CDOs’ values are difficult to ascertain and may be virtually zero. “[A] lot of these things will have little or no market value,” said Miguel Browne, assistant director in the FDIC’s division of resolutions and receiverships.
The FDIC reportedly hopes to auction its CDOs this summer. If there are no buyers, the FDIC will probably write them off. Ultimately, the taxpayers will bear the losses.
Since 2009, approximately 200 banks have failed. They include Omni National Bank in Atlanta, Venture Bank in Lacey, Wash., San Diego National Bank, and Riverside National Bank of Florida.
Many of the bank failures have been accelerated by losses in trust preferred securities. Wall Street brokerage firms bought the bank-issued securities, packaged them into CDOs, and sold tranches of the CDOs to other small banks like the ones in receivership. Community banks were sold $12 billion of these trust preferred CDOs between 2000 and 2008, according to the article.
Riverside bought 27 trust preferred CDOs with a book value of $211 million between 2005 and 2007. It bought the securities from Wall Street firms, including Merrill Lynch (now owned by Bank of America), FTN Financial, a unit of First Horizon National Corp., and boutique financial-services firm Keefe, Bruyette & Woods Inc.
Riverside’s portfolio of trust preferred securities reportedly dropped more than 60% to $79 million by the end of 2009. When Riverside failed last month, Toronto-Dominion Bank of Canada acquired the certain assets, including its branches, $2.76 billion in deposits and most of its $3.42 billion of assets, but it left the trust preferred securities to the FDIC.
Riverside filed actions against more than a dozen firms that sold it the trust preferred securities, which sales were allegedly “based on inflated investment-grade ratings, undisclosed material conflicts of interest,” as well as misrepresentations by the brokerage firms. Defendants also include McGraw-Hill Cos., which owns credit-ratings firm Standard & Poor’s, and Moody’s Investor Service, which allegedly issuing bogus ratings on the CDOs.
In an unusual move, the FDIC has asked a New York court for permission to replace Riverside as plaintiff in a six-month-old lawsuit.