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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

FDIC Structured Transaction Fact Sheet

Background

In the early 1990s, the Resolution Trust Corporation (RTC) and the FDIC entered into a number of joint ventures or partnerships with the private-sector to facilitate the disposition of an unprecedented number of assets held by the RTC or FDIC as receiver or conservator for numerous failed banks and thrifts. These transactions were structured to align the interests of the parties and to capture the asset management efficiencies and expertise of the private sector. The strategy yielded higher present value recoveries to the RTC and FDIC than conventional sales methods.

The Partnerships

From December 1992 through October 1995, the RTC created 72 partnerships in the form of limited partnerships and business trusts holding real estate loans and assets with a total book value of $21.4 billion. Under the partnership program, the RTC acted essentially as a passive participant or limited partner (LP), with a private-sector investor, responsible for managing and disposing of the assets and acting as the general partner (GP). The RTC aligned the financial incentives for the LP and GP to ensure that the assets in the portfolio would be liquidated in the most cost effective and mutually profitable manner.

The RTC contributed asset pools, usually subperforming loans, nonperforming loans, and real estate owned (REO) and arranged for financing of the partnership, while the GP invested equity capital and asset management services. The financing terms required that cash proceeds generated from the liquidation of assets be applied first to the retirement of the debt (usually bonds held by the RTC). After the debt was paid in full, the partners split the remaining proceeds according to the percentage of ownership each partner held.

Lessons Learned

The RTC experience demonstrated that partnerships could successfully be used as a vehicle to convey a large volume of assets of varying types and quality to private-sector ownership and management in a relatively short period of time. The partnerships were structured using several different legal forms with RTC holding a range of residual interests. Results achieved through this partnership model were higher than through other multiple-asset cash only sales methods, where assets were sold into a depressed market and discounted for unstable market conditions and a lack of liquidity.

Recent Structured Transactions

The FDIC, as receiver for a failed institution, has a legal responsibility to maximize recovery on assets. In accordance with this responsibility, the FDIC employs a variety of strategies to manage and sell the assets of failed institutions.

In early 2008, the FDIC, drawing on its past success with partnerships, again turned to the partnership model to sell large numbers of distressed assets (primarily non-performing single family and commercial real estate loans and related real property) held by recently failed financial institutions. Since that time, the FDIC has entered into two basic types of structured transactions with private sector investors, with all transactions to date using limited liability companies (LLCs). As of December 2012, the FDIC has closed 34 structured transactions, disposing of more than 42,900 assets and $25.98 billion in unpaid principal balance.

Risk Share Data Specifications

Key Points

The structured transactions allow the FDIC to retain an interest in the assets, while transferring day-to-day management responsibility to expert private sector professionals who also have a financial interest in the assets and share in the costs and risks associated with ownership

How it works: