Receivables From Resolutions, Net at December 31 Dollars in Thousands
Receivables from closed banks
Receivables from operating banks
Allowances for losses
The receivables from resolutions include payments made by the DIF to cover obligations to insured depositors, advances to receiverships and conservatorships for working capital, and administrative expenses paid on behalf of receiverships and conservatorships. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. Assets held by DIF receiverships and conservatorships are the main source of repayment of the DIF’s receivables from resolutions. As of December 31, 2008, there were 41 active receiverships, including 25 from institution failures that occurred in the current year, and one active conservatorship resulting from the IndyMac Bank resolution.
As of December 31, 2008 and 2007, DIF receiverships and conservatorships held assets with a book value of $45.8 billion and $1.2 billion, respectively (including cash, investments, and miscellaneous receivables of $5.1 billion and $363 million, respectively). The large increase in DIF receivership and conservatorship assets is due to the 2008 failures. These comprised $40.2 billion or 99% of the current $40.7 billion in assets in liquidation book values. Due to the sudden increase of receivership and conservatorship assets since May 2008, the FDIC modified its process of computing the allowance for loss.
For those receiverships established prior to May 2008, the estimated cash recoveries from the management and disposition of assets that are used to derive the allowance for losses were based on a sampling of receivership assets in liquidation. Sampled assets were generally valued by estimating future cash recoveries, net of applicable liquidation cost estimates, and then discounted using current market-based risk factors applicable to a given asset’s type and quality. Resultant recovery estimates were extrapolated to the non-sampled assets in order to derive the allowance for loss on the receivable.
Estimated cash recoveries on those receiverships and conservatorships established since May 2008 are based on asset recovery rates derived from several sources including: actual or pending institution-specific asset liquidation data; failed institution-specific asset valuation data; aggregate asset valuation data on several recently failed or troubled institutions; and empirical asset recovery data based on failures as far back as 1990. The resulting estimated cash recoveries are then used to derive the allowance for loss on the receivables from these resolutions. Ninety-nine percent of total receivership assets in liquidation were valued by this methodology.
Estimated asset recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic and market conditions. Recent economic uncertainties could cause the DIF’s actual recoveries to vary significantly from current estimates.
Financial instruments that potentially subject the DIF to concentrations of credit risk are receivables from resolutions. The main source of repayment of DIF’s receivables from resolutions are assets held by DIF receiverships. Excluding the assets of the IndyMac Bank resolution (see below), the majority of the $15.0 billion in assets in liquidation are concentrated in commercial loans ($2.8 billion), commercial real estate ($6.2 billion), and residential loans ($2.6 billion), which were primarily retained from institutions that failed in 2008. Eighty-six percent of the assets in these three asset types were retained from failed banks located in Nevada ($4.0 billion), Texas ($2.9 billion), Georgia ($2.2 billion), and Arkansas ($.9 billion). The assets of the IndyMac Federal Bank, FSB conservatorship are excluded from this analysis since the FDIC signed a letter of intent at year-end 2008 to sell the banking operations of IndyMac Federal Bank to a thrift holding company (see below).
IndyMac Federal Bank
On July 11, 2008, IndyMac Bank, FSB, Pasadena, CA was closed by the Office of Thrift Supervision, with the FDIC named receiver. IndyMac Bank was the third largest insolvency in FDIC history with $28.0 billion in total assets at failure. The FDIC transferred the insured deposits and substantially all the assets of the failed bank to IndyMac Federal Bank, FSB, a newly-chartered federal institution that the FDIC operated as a conservator to maximize the value of the institution for a future sale.
Through December 31, 2008, the DIF disbursed $5.8 billion to fund the obligations to insured depositors of IndyMac Bank and $9.4 billion to the conservatorship to fund its operations under a $12 billion line of credit. These amounts are included in the chart above in the receivables from closed banks and operating banks, respectively. Additionally, DIF recorded a $10.7 billion allowance for loss against these receivables.
On December 31, 2008, the FDIC signed a letter of intent to sell the banking operations of IndyMac Federal Bank to a thrift holding company controlled by IMB Management Holdings LP, a limited partnership, for $13.9 billion. On March 19, 2009, the FDIC completed the sale of IndyMac Federal Bank, FSB, to One West Bank, FSB (One West), a newly formed Pasadena, California-based federal savings bank organized by IMB HoldCo LLC. One West purchased all deposits and approximately $20.7 billion in assets at a discount of $4.7 billion. The FDIC retained the remaining assets for later disposition.
The sale includes a provision wherein the IndyMac receiver will share losses on a $13 billion portfolio of whole mortgage loans with the buyer fully assuming the first 20 percent of losses after which the receiver will share 80 percent for the next 10 percent of losses and 95 percent thereafter, with the buyer responsible for the remainder. The shared loss agreement will expire on the earlier of: 1) 10 years, 2) the date the buyer liquidates the portfolio, or 3) when the remaining outstanding balance reaches 10 percent of the closing date balances. The liability for loss sharing is accounted for by the IndyMac receiver and is considered in the determination of the DIF’s allowance for loss of $10.7 billion against the corporate receivable from this resolution. The FDIC will also retain an 80 percent interest of cash flows in a separate $2.4 billion portfolio of mostly construction loans.
In addition, the FDIC offered representations and warranties on loan sales from the conservatorship. The total amount of loans sold subject to representations and warranties was $3.2 billion. No contingent liabilities associated with these representations and warranties were recorded at December 31, 2008. However, future losses could be incurred through the expiration date of the contracts offering the representations and warranties, some as late as 2048. Furthermore, because of the uncertainties surrounding the timing of when claims may be asserted, the FDIC is unable to reasonably estimate a range of loss to the DIF from outstanding contracts with unasserted representation and warranty claims. The FDIC believes it is possible that additional losses may be incurred by the DIF from the universe of outstanding contracts with unasserted representation and warranty claims.