CRISIS and RESPONSE An FDIC History, 2008–2013 ii ISBN 978-0-9661808-1-7 iii Contents Foreword ...................................................................................................................... vii Acknowledgments ..................................................................................................... viii Overview .......................................................................................................................xi Part 1: Financial Crisis and Response Chapter 1. Origins of the Crisis ..............................................................................3 Chapter 2. The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception ...............................................................33 Chapter 3. Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis ...............................................................67 Part 2: Banking Crisis and Response Chapter 4. Bank Supervision ...............................................................................101 Chapter 5. Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments ..........................................................................151 Chapter 6. Bank Resolutions and Receiverships ...............................................175 Index ...........................................................................................................................241 iv List of Tables and Figures Note: Readers should note that if no source is given for data, the source is the FDIC. Figure 1.1. S&P/Case-Shiller Home Price Index, 1987–2013 .............................................. 8 Figure 1.2. Real Home Price Index, 1890–2013 ..................................................................... 8 Figure 1.3. Home Sales and Home Price Index, 2000–2013 .............................................. 14 Figure 1.4. Mortgage Loans Past Due, by Type of Loan, 2000–2013 ................................ 15 Figure 1.5. Issuance of Mortgage-Backed Securities, 1990–2013 ..................................... 17 Figure 1.6. Mortgage Credit Default Swap ABX Indexes ................................................... 21 Figure 1.7. Markets Heat Map ................................................................................................. 29 Figure 2.1. Interbank Lending Spreads, December 2006–December 2010 ..................... 39 Figure 2.2. Trends in Senior Unsecured U.S. Bank Debt Issuance before and after September 2008 ..................................................................................................... 40 Figure 2.3. DGP Debt Outstanding, October 2008–December 2012 .............................. 45 Figure 2.4. Amounts Guaranteed by the TAGP, 2008–2010 .............................................. 53 Figure 2.5. DGP Debt Outstanding by Type, October 2008–December 2009 ............... 54 Figure 2.6. Maturities of TLGP Debt Outstanding at Month End, October 2008–October 2009 ............................................................................... 55 Figure 2.7. Funding Costs: TLGP Debt vs. Non-Guaranteed Debt, January 2007–October 2009 ................................................................................ 55 Figure 2.8. TLGP vs. Non-TLGP Debt Issuance, October 2008–October 2009 ............. 56 Figure 2.9. The Costs of the TAGP: The 5 Most Expensive Failures vs. All Others ($ Millions, as of December 31, 2016) ............................................................... 58 Table 2.A. Issuers of $250 Million or More in FDIC-Guaranteed Debt ......................... 61 Figure 3.1. Timeline of Wachovia Events .............................................................................. 69 Table 3.1. Top Ten Banking Organizations by Depository Institution Asset Size, June 30, 2008 .......................................................................................................... 70 v Figure 3.2. Timeline of Citigroup Events .............................................................................. 77 Table 3.2. Citigroup Asset Guarantee Loss Positions ........................................................ 83 Figure 3.3. Timeline of Bank of America Events ................................................................. 86 Table 3.3. Bank of America Asset Guarantee Loss Positions ........................................... 90 Figure 4.1. Real Estate Loans as a Percent of Total Loans, 1996–2016 (Banks with Total Assets < $10 Billion) ........................................................... 106 Table 4.1. Number of Problem Banks and Failures, 2007–Q1 2017 ............................. 119 Figure 4.2. Downgrades of 1- and 2-Rated Banks: Ratio of ADC Loans to Capital .... 120 Figure 4.3. Downgrades of 1- and 2-Rated Banks: Asset Growth ................................... 121 Figure 4.4. Downgrades of 1- and 2-Rated Banks: Ratio of Wholesale Funding to Total Assets ...................................................................................................... 122 Figure 4.5. Cumulative Failure Percentage by Equity-to-Asset Ratio, 2003–2016 ....... 123 Figure 4.6. Number of Formal Safety-and-Soundness Enforcement Actions Issued by FDIC, 2000–2016 ............................................................................... 128 Table 4.2. Supervisory Focus and Outcomes for Selected Banking Organizations.... 134 Figure 4.7. Status of Institutions on Problem-Bank List, 2008–Q1 2017 ....................... 137 Figure 4.8. Return on Equity, 1869–2014 ............................................................................ 139 Figure 5.1. Timeline of Events and Reserve Ratio Trends Q1 2007–Q3 2016 .............. 156 Figure 5.2. Contingent Loss Reserve, DIF Portfolio Liquidity, and DIF Balance, Q1 2007 – Q4 2010 ............................................................................................. 159 Table 5.A.1. Assessment Rate Schedule, Q1 2009 ................................................................ 169 Table 5.A.2. Assessment Rate Schedule, Q2 2009–Q1 2011 .............................................. 169 Table 5.A.3. Assessment Rate Schedule, Q2 2011–Q2 2016 .............................................. 170 Table 5.A.4. Assessment Rate Schedule, Q3 2016 to Present (After the reserve ratio reaches 1.15 percent but is less than 2.0 percent) .......................................... 171 Table 5.A.5. Assessment Rate Schedule (After the reserve ratio reaches 2.0 percent but is less than 2.5 percent)................................................................................ 172 Table 5.A.6. Assessment Rate Schedule (After the reserve ratio reaches 2.5 percent) ... 173 vi Table 6.1. Comparison of Franchise Sales and Retained Asset Sales ............................ 178 Figure 6.1. Number of FDIC Bank Resolutions by Year ................................................... 182 Figure 6.2. Total Assets of Failed Banks by Year of Resolution ....................................... 183 Table 6.2. Common P&A Transactions ............................................................................. 189 Table 6.3. FDIC Bank Resolutions by Resolution Type, 2008–2013 ............................. 200 Table 6.4. FDIC Losses by Resolution Type, 2008–2013 ................................................ 200 Table 6.5. Selected Condition Indicators by Resolution Type ....................................... 201 Figure 6.3. Failed Banks as a Percentage of All Banks by Year from Start of Each Crisis ............................................................................................................ 203 Figure 6.4. Total DRR Authorized and On-Board Full-Time Staff, 2008−2011 ........... 204 Figure 6.5. Loans, ORE, and Subsidiaries in Liquidation, 2008−2013 ........................... 211 Table 6.6. LLC Recovery Rates ............................................................................................ 218 Figure 6.6. Loss-Share Asset Portfolio at Resolution, Number and Dollar Amount ... 221 vii Foreword A decade ago the U.S. financial system experienced its worst crisis since the 1930s. Far from being confined to the U.S. banking industry, the crisis would turn out to be a global systemic event. Stemming the crisis required unprecedented actions by the U.S. government, including the FDIC, to restore confidence in financial markets and to address the problems of systemically important financial institutions. The purpose of this volume is to present a firsthand account of the important role that the FDIC played in responding to the crisis. We hope it will serve as a guidepost for future policymakers who will someday be called upon to respond to the next period of financial instability. It also conveys an important lesson: We must not become complacent when economic and banking conditions appear strong. It is precisely during these times that the seeds can be sown for the next financial crisis. This study is organized into two parts. The first, Chapters 1 through 3, is an account of the origins of the crisis and the FDIC’s unprecedented use of emergency authorities to respond to financial market illiquidity and the problems of systemically important financial institutions. The second, Chapters 4 through 6, documents the challenges that the FDIC faced in carrying out its core missions of bank supervision, deposit insurance, and failed- bank resolution. This seems to us the best framework for understanding the role that the FDIC played during the crisis and the