FDIC Starts Selling $114 Billion of Bonds From Failed Banks
Bonds that were held by Silicon Valley Bank will help pay for the cost of rescuing depositors. Photo: Steven Senne/Associated Press By Matt Wirz April 19, 2023 8:00 am ET The Federal Deposit Insurance Corp. has begun selling bonds it inherited from Silicon Valley Bank and Signature Bank to recoup the cost of rescuing the failed banks’ depositors. The FDIC put up for auction about $700 million of high-quality mortgage-backed bonds Tuesday in what could prove to be a test of how much the U.S. government recovers on the $114 billion in face value of the bonds it assumed. “Per the median price guidance from the six dealers who have published price talk so far, the government should expect to get back around 86 cents on the dollar for the entire portfolio,” said Adam
Bonds that were held by Silicon Valley Bank will help pay for the cost of rescuing depositors.
Photo: Steven Senne/Associated Press
By
The Federal Deposit Insurance Corp. has begun selling bonds it inherited from Silicon Valley Bank and Signature Bank to recoup the cost of rescuing the failed banks’ depositors.
The FDIC put up for auction about $700 million of high-quality mortgage-backed bonds Tuesday in what could prove to be a test of how much the U.S. government recovers on the $114 billion in face value of the bonds it assumed.
“Per the median price guidance from the six dealers who have published price talk so far, the government should expect to get back around 86 cents on the dollar for the entire portfolio,” said Adam Murphy, founder of Empirasign, a bond-data service.
The FDIC estimates that its deposit-insurance fund will lose about $22.5 billion from depositor payouts. Most of that will be reimbursed through an assessment on other banks, resulting in a $3.3 billion net loss, the agency said.
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Subscribe NowAbout $19.2 billion of the losses came from payments on accounts that exceeded the standard $250,000 limit on FDIC insurance. The larger deposits were only covered after U.S. authorities designated SVB and Signature Bank as a systemic risk. The FDIC can recover those outlays from banks it insures.
The market for mortgage-backed bonds weakened slightly this week, possibly in anticipation of future sales by the government. The risk premium investors demand to buy frequently traded 30-year mortgage bonds has roughly doubled since mid-February to about 0.65 percentage point over U.S. Treasury bonds, according to FactSet.
“It’s going to be a challenge to absorb $90 billion of market value,” said Walt Schmidt, a senior vice president at FHN Financial, a mortgage-bond brokerage.
Wall Street analysts had expected the FDIC to start disposing of the bonds in May. The agency decided to move forward as soon as the logistics of the auction were arranged, in part because holding marketable securities isn’t part of the FDIC’s core mission, people familiar with the matter said.
The FDIC put up for sale on Tuesday $292 million of agency bonds backed by mortgages guaranteed by the government-controlled lenders Fannie Mae and Freddie Mac
All of the bonds auctioned so far are rated triple-A, the highest designation from credit-rating firms. Next week the FDIC plans to sell about $660 million of bonds, some of which are far riskier, with ratings as low as triple-C, according to Empirasign.
Write to Matt Wirz at [email protected]
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