In the aftermath of the unsettling collapses of Silicon Valley Bank and Signature Bank, the United States government grapples with the weight of nearly $13 billion in mortgage bonds that have proven exceptionally challenging to offload. Originally backed by long-term, low-rate loans primarily earmarked for affordable apartment construction projects, the Federal Deposit Insurance Corporation (FDIC) absorbed these bonds as part of a substantial $114 billion portfolio when it stepped in to take over the beleaguered banks.
Amidst this financial turmoil, the FDIC turned to BlackRock, a seasoned player in handling financial crises, to orchestrate the sale of the securities held in its capacity as receiver. While a significant portion of the portfolio found new owners within a few months, a perplexing problem lingered in the form of approximately $12.7 billion in bonds tied to project loans sponsored by Ginnie Mae.
The quagmire surrounding the sale of these securities is multifaceted. For starters, the bond coupons are expected to remain stubbornly below market rates for the foreseeable future. Compounding this dilemma is that these loans originated before the Federal Reserve’s interest rate hikes, which means early refinancing incurs hefty penalties, and the loans themselves may take decades to reach full maturity.
To navigate this labyrinthine situation, the FDIC has contemplated various strategies, including repackaging the debt into new securities. However, restructuring mortgage bonds comes with its complexities, potentially leaving the FDIC saddled with assets that are challenging to liquidate over the long term.
BlackRock’s Financial Markets Advisory team, renowned for its crisis management acumen, was enlisted to guide the FDIC through these turbulent waters. Nevertheless, the idiosyncratic nature of Ginnie Mae project-loan bonds has proven a formidable obstacle to swift resolution.
Remarkably, the $12.7 billion in FDIC assets that have proved resistant to sale is nearly equivalent to the annual issuance of bonds by Ginnie Mae. While enticing investors with reorganized mortgage bonds may be an option, it has limitations that must be addressed.
Some investors may be tempted by derivative instruments that amalgamate and redistribute bond cash flows, yet this approach still needs to eliminate the inherent risks within the loans themselves. Ultimately, it may shift the risk elsewhere rather than conquering it.
Persisting with a strategy of holding these assets until maturity is an unsustainable proposition for the FDIC. The agency’s primary mandate is to maximize profits while ensuring access to affordable housing for individuals with low and moderate incomes, but it is only obliged to retain assets for a while.
In a significant development, the FDIC announced in April that it had assumed control of First Republic Bank, with the assets and deposits slated for acquisition by JPMorgan, the largest bank in the United States, and the world’s largest bank by market capitalization.
Amidst these financial tribulations, March witnessed the collapse of three U.S. banks, including the aforementioned First Republic. Silvergate Bank, known for its cryptocurrency-friendly stance, succumbed on March 8, its woes compounded by the lingering aftermath of the FTX crash.
A mere two days later, panic gripped SVB Financial Group, a prominent lender to high-growth technology companies in Silicon Valley. Fearing a contagion effect, federal authorities took the unprecedented step of shuttering Signature Bank on March 12.
In these tumultuous times, the U.S. financial landscape remains fraught with challenges and uncertainties as government agencies and financial institutions grapple with the formidable task of navigating uncharted waters. The intricate dance between risk, opportunity, and responsibility continues, underscoring the resilience and adaptability of the financial sector in the face of adversity.
