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2009 Annual Report
I. Management's Discussion and Analysis
Resolutions and Receiverships
The FDIC employs a variety of business practices to resolve a failed institution. These business practices are typically associated with the resolution process or the receivership process. Depending on the characteristics of the institution, the FDIC may recommend several of these practices to ensure prompt and smooth payment of deposit insurance to insured depositors, to minimize impact on the Deposit Insurance Fund, and to speed dividend payments to creditors of the failed institution.
The resolution process involves valuing a failing institution, marketing it, soliciting and accepting bids for the sale of the institution, determining which bid is least costly to the insurance fund, and working with the acquiring institution through the closing process.
In order to minimize disruption to the local community, the resolution process must be performed quickly and as smoothly as possible. There are three basic resolution methods: purchase and assumption transactions, deposit payoffs, and utilizing a Deposit Insurance National Bank (DINB).
The purchase and assumption (P&A) transaction is the most common resolution method used for failing institutions. In a P&A transaction, a healthy institution purchases certain assets and assumes certain liabilities of the failed institution. There are a variety of P&A transactions that can be used. Since each failing bank situation is different, P&A transactions provide flexibility to structure deals that result in the highest value for the failed institution. For each possible P&A transaction, the acquirer may either acquire all or only the insured portion of the deposits. Loss sharing may be offered by the receiver in connection with a P&A transaction. In a loss sharing transaction, the FDIC as receiver agrees to share losses on certain loans with the acquirer. The FDIC usually agrees to absorb a significant portion (for example, 80 percent) of future losses on assets that have been designated as "shared loss assets" for a specific period of time (for example, five to ten years). The economic rationale for these transactions is that retention of shared loss assets in the banking sector can produce a better net recovery than would the FDIC's immediate liquidation of these assets.
Deposit payoffs are only executed if a bid for a P&A transaction does not meet the leastcost test or if no bids are received, in which case the FDIC, in its corporate capacity as deposit insurer, makes sure that the customers of the failed institution receive the full amount of their insured deposits.
The Banking Act of 1933 authorized the FDIC to establish a DINB to assume the insured deposits of a failed bank. A DINB is a new national bank with limited life and powers that allows failed bank customers a brief period of time to move their deposit account(s) to other insured institutions. A DINB allows for a failed bank to be liquidated in an orderly fashion, minimizing disruption to local communities and financial markets. Another resolution option, open bank assistance transactions, generally can only be used in the event the bank's failure would result in systemic risk.
The receivership process involves performing the closing functions at the failed institution, liquidating any remaining failed institution assets, and distributing any proceeds of the liquidation to the FDIC and other creditors of the receivership. In its role as receiver, the FDIC has used a wide variety of strategies and tools to manage and sell retained assets. These include, but are not limited to asset sale and/or management agreements, partnership agreements, and securitizations.
Financial Institution Failures
The following chart provides a comparison of failure activity over the last three years.
Asset Management and Sales
Structured asset sales in 2009 included $1.3 billion of residential loans from Franklin National Bank. This transaction involved FDICguaranteed purchase money debt, and equity in a Limited Liability Company (LLC) shared between the receiver and the successful bidder.
The Corus Construction Venture LLC structured asset sale consisted of $4.5 billion of condominium and office construction loans from Corus Bank. In this transaction, the FDIC structured the purchase money debt at an initial term leverage of one-to-one to the bidders and structured the notes to be in the form of multiple bullet maturity notes guaranteed by the FDIC.
In 2009, the book value of assets under management increased by $26.2 billion to $41.4 billion. The following chart shows beginning and ending balances of assets by asset type.
Receivership Management Activities
Minority and Women Owned Businesses
Protecting Insured Depositors
The FDIC's ability to attract healthy institutions to assume deposits and purchase assets of failed banks and savings associations at the time of failure minimizes the disruption to customers and allows assets to be returned to the private sector immediately. Assets remaining after resolution are liquidated by the FDIC in an orderly manner, and the proceeds are used to pay creditors, including depositors whose accounts exceeded the insurance limit. Effective October 3, 2008, through December 31, 2009, the standard maximum deposit insurance amount increased from $100,000 to $250,000, and this increase was later extended to December 31, 2013. During 2009, the FDIC paid dividends of $21.0 million to depositors whose accounts exceeded the insured limit(s).
Professional Liability and Financial Crimes Recoveries
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