FDIC Closes Sales of Failed Banks’ Loans

The FDIC said Tuesday that it has completed sales of $2 billion in notes backed by real estate loans seized from two big bank failures â€" Corus Bank in Chicago and Franklin[IMAGE]Bank in Houston, Texas. The sales were conducted through ""private offerings to qualified purchasers,"" the federal agency said in a press statement.

According to the FDIC, the note sales will increase recoveries for the two bank closings and receiverships and return substantial funds to the deposit insurance fund, which has taken repeated hits because of the elevated number of bank failures over the past two years.

This type of debt package â€" a collateralized debt obligation (CDO), in fact â€" has come under some pretty harsh scrutiny for the role economists say they played in the nation's financial crisis and the high-risk climate on Wall Street. Regulation of derivatives trading has become a focal point of the financial reform legislation moving through Congress. But the FDIC has tacked on some additional assurance to its CDOs to minimize risk for investors.

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The notes do not accrue interest or make payment prior to maturity, but rather are sold at a discount and allow investors to earn the difference between the sale price and the principal balance paid at maturity. The FDIC is guaranteeing the timely payment of principal due on the notes, backed by the full faith and credit of the United States.

The first batch â€" $1.38 billion of Corus notes â€" is backed by REO assets and construction loans, with unpaid principal balances of $4.5 billion.

The notes were originally issued in October 2009 to the Corus Bank receivership through the limited liability company (LLC) created to hold the assets for a deal with an investor consortium led by ""Starwood Capital Group"":http://www.starwoodcapital.com. Starwood purchased a 40 percent stake in the LLC and its assets at that time. The FDIC held on to a 60 percent stake as part of the transaction.

The second structured sale â€" $653 million of Franklin notes â€" is backed by both performing and non-performing residential loans and REO assets, with an aggregate unpaid principal balance of $1.22 billion.

The notes, which were restructured for the current transaction, were originally issued in September 2009 to the Franklin Bank receivership. In that deal, ""Residential Credit Solutions"":http://www.residentialcredit.com bought a 50 percent stake in the LLC and its retained assets. The FDIC owns the other 50 percent.

""Barclays Capital Inc."":http://barcap.com served as the sole bookrunner, structuring agent, and financial advisor to the FDIC on the sale of both notes.

These offerings mark only the second and third sales of structured notes by the FDIC since the early 1990s.