Who says investment banking is deal. The new deal brokers on The Street are the Fed, Treasury and, increasingly, the FDIC. Under Sheila Bair, the FDIC’s role in the credit crunch is getting larger and larger. When Indymac went down, it caused great concern that the FDIC’s industry-funded deposit insurance fund would quickly be depleted as more banks were poised to fail.
And the failures did come, but Bair has engineered a new FDIC model. Last week when the FDIC seized WAMU, it would have caused massive concern but Bair had also been negotiating with JP Morgan behind the scenes to come up and buy them at a bargain. We talked about how this FDIC-led deal was a win for all involved. Bair did it again with the Citigroup takeover of Wachovia, further solidifying the failure/takeover model. In the Citi/Wachovia deal, Citi entered into a loss-sharing agreement with the FDIC on a pre-agreed pool of loans where Citi will absorb about $42 billion in losses on a $312 billion pool of loans, and the FDIC will absorb the rest.
In this environment, Bair is emerging as a creative problem solver and it’s much needed as more banks are poised to fail.