Fox Business Network’s Charlie Gasparino reports that the FDIC is looking to separate Shorebank’s assets and take control of the more toxic assets. Sources involved in the negotiations say this breakup is a “face saving measure” but the general sentiment on Wall Street is that there is “not much to save” and without ties to the Obama administration, no bank would be “bailed out in this fashion.”
Here are the key highlights from the report, courtesy of FOX Business Network:
On what is going to happen to Shorebank:
“The fate of Shorebank continues to linger. One of the plans on the drawing board is a breakup of Shorebank into what’s known as a ‘good bank’ or a ‘bad bank.’ Basically taking the bad bank; the subprime loans, all the faulty lending out of the good part of the bank, some of the businesses they consider good. The FDIC would take this bad bank stuff over while the better part of the firm would be able to survive.”
On why the FDIC is breaking up the bank:
“Sources close to the negotiations say it’s a face saving measure. The Wall Street firms at this point do not want to pony up any more money to bail out Shorebank. If they don’t give any more money, it’s hard to capitalize this where it remains solvent. The Fed has said the amount of money on the table right now, close to $225 million dollars in bailout money, is not enough.”
On whether Shorebank is worth saving:
“On Wall Street not a lot of people think there is much to save here. But this is what I hear they are going to do.”
On how this approach “saves face” for the Obama administration:
“This is obviously a big public relations black eye for the Obama administration…This is a big embarrassment for them. One way out is to divide it up, have the government take over the bad stuff, the good stuff survives, and everybody goes home happy almost.”
On whether this plan shows the Obama administration gave Shorebank special treatment:
“It’s an admission that this bank should have failed. Politics aside, there is no way if this bank did not have close ties to the Obama administration would Wall Street have gone out of its way to bail it out. And they did not do it because they knew it had ties, they were prodded by the FDIC. Wall Street firms told me a lot of political pressure was used. Valerie Jarrett’s name, Senior Advisor to the president, was thrown about in these meetings plenty of times trying to get the Wall Street guys to give money. Valerie Jarrett has ties to this bank. Amid all the troubles Goldman Sachs was facing a couple months ago Lloyd Blankfein was on the phone making calls to his fellow CEO’s to bailout Shorebank.”
On when this tactic has been used in the past:
“When they tried to save Lehman this is exactly what they did. They tried to separate out the toxic assets from the main investment bank. The toxic assets would be taken over by the government, or in the case of Lehman by the big Wall Street firms that were going to buy it to protect the systemic risk that would have occurred if the whole thing went down. And then the good bank of the investment banking business that Lehman would have continued. That did not happen.”
So, Shorebank gets broken up (it's already broken) and the FDIC takes the toxic assets. This sounds a bit odd to me, but I guess if the alternative is that the FDIC takes over the entire bank, suffers a loss as a result and then sticks the Board of Directors and Senior Management at not only the parent holding company, but the subsidiary operations as well, then sure, breaking the company is really appealing: The Obama administration saves face, the FDIC doesn't come off as bad, and the insiders of Shorebank get a sweet deal. The thing of it is that if this were another bank without the protection from the Beltway, the operation would have been shuttered in a heart beat.