FDIC trying to minimize losses to insurance fund

To the editor:

Hubble Smith's Aug. 5 article questioning the Federal Deposit Insurance Corporation's tactics for selling assets from failed banks relied on the insights of individuals with a limited understanding of how the FDIC operates.

The financing and capital structure for the Corus transaction is complex and easily misunderstood. The financing was not provided to the private-sector acquirer, Starwood, which paid all cash for its interests, rather it was provided to the LLC in which the FDIC owns the majority stake. Since the Corus assets were loans to developers to build entire condo complexes, the financing terms made absolute sense. By nature, construction loans require the lender to disburse cash, which means that the LLC would even need more cash to make payments on the LLC's financing. Providing financing allows our equity partners more flexibility to work with the developers. Without it, foreclosures would be the only answer to pay back the financing.

Contrary to what the article says, this sales strategy was used very successfully by the Resolution Trust Corp. during the savings and loan crisis of the late '80s and early '90s. It has resulted in 10 to 20 percent higher returns than the outright cash sale of loans advocated by one of the sources in the article.

I'd also like to address the inaccurate comment that the loans were sold in this manner because the FDIC has run out of money. The FDIC has about $40 billion in cash and securities at its disposal to make good on its obligation to protect depositors of the nation's banking industry. The structure of this sale has nothing to do with the FDIC's liquidity, and instead, is a direct result of FDIC's requirement to minimize losses to the deposit insurance fund. The alternative of dumping distressed assets onto already depressed markets at fire-sale prices would only increase FDIC's losses and further depress prices in those communities.

Andrew Gray

Washington, D.C.

The writer is director of the Federal Deposit Insurance Corporation's office of public affairs.