On the FDIC Subrogated Claim:
On WaMu's receivership balance sheet, on FDIC website, we see a 151 billion FDIC Subrogated Claim, with 100% dividends paid to date. See WaMu receivership balance sheet
To give a perspective on what this actually means (from the FDIC website):
FDIC Claim Priority, Payments, and Setoffs: Who Gets Paid First After A Bank Fails
By Joshua Glazov on July 6, 2009
Posted in Construction Finance and Insolvency, FDIC & Bank Failures
In the last bank insolvency post we talked about limits on claims against the estate of a failed bank after the Federal Deposit Insurance Corporation (the “FDIC”) takes over as the bank’s receiver. Today we’re going to talk about:
The priority of which claims the FDIC pays in what order from the assets of the failed bank’s estate
What’s likely to be left in the estate when the FDIC gets around to paying your repudiation damage claims
What claims you can set-off against the FDIC when they come after you, as a former borrower with a principal and interest balance still outstanding on your loan
Customers lined up in panic outside the American Union Bankduring 1930's run on the bank Claim Allowance and Payment
We’ve already talked some about how the FDIC denies claims in the last post. Once they allow a claim, the FDIC issues the claim holder a Certificate of Award, sometimes called a Receiver’s Certificate, in the amount of their allowed claim. Payment on a claim, or part of a claim, is called a Dividend.
Sometimes the FDIC will pay an advance Dividend if they expect a good recovery of money into the receivership estate. But, generally, because of the priorities we’ll talk about below, the FDIC doesn’t pay much in the way of Dividends.
Assume for the moment that despite the strict limits on your claims for damages after the FDIC repudiates your loan – regardless of whether it’s a construction loan, a revolving line of credit, or some other type of loan – the FDIC ultimately allows a pretty substantial claim against the failed bank’s receivership estate. You’re not out of the woods or into the money quite yet. You’re probably a long way from there. You see even though the FDIC has allowed your repudiation damages claim, whether you see any cash depends on:
The priority of your claim (i.e., of all the people the failed bank owes money to, how far back are you in the queue of those asking for payment), and
Whether there is any money left when you get to the head of the queue?
Under the 1993 National Depositor Preference Amendment to the Federal Deposit Insurance Act found in Section 11(d)(11) of the Federal Deposit Insurance Act, the FDIC pays out allowed claims in the following order. Everyone in each claim group must get paid in full before anyone in the next group down gets paid.
1st Administrative Expenses – These are the FDIC’s expenses as receiver for the failed bank, payment of professionals who operate work for the bank after appointment (e.g., lawyers, accountants, consultants). These are 650k according to WaMu receivership balance sheet
2nd Depositor Claims – These are deposits at the bank when the FDIC gets appointed as receiver. The biggest claim holder here is usually the FDIC because they pay depositors’ deposit insurance claims, up to the deposit insurance limit, very quickly; usually long before all of the failed bank’s assets are marshaled and liquidated. So the FDIC steps into the shoes of the depositors’ claims against the estate to the extent the FDIC has paid-off depositors. Lawyers call this subrogation. The FDIC pays the depositor in full up to the deposit insurance limit. In exchange, the FDIC gets the depositor’s claim against the failed bank’s estate. Then the FDIC gets the depositor’s claim against the failed bank’s estate. The first money that comes into the estate – principal and interest from loans to borrowers – goes to pay off those claims. This depositor group also includes claims for the parts of deposits that exceed the FDIC insurance. The individuals and organizations still hold these claims and wait stand-by for dividends on them. JPM took on the WaMu deposits so there are ZERO depositor claims
3rd Other Senior and General Claims – These are the many and diverse other claims against the estate of the failed bank. They include things like your claim for contract repudiation damages. The amount of any money left to pay these claims is usually modest. General creditors have a claim of 19.2 million and senior debt holders have a claim of 6.1 billion
4th Subordinated Obligations – There’s usually no money left to pay these claims. Subordinated debt has a claim of 7.7 billion. And not to forget DB has a 3 billion "unproven claim" with this priority too.
5th Bank Shareholder Claims – There’s usually
no money left to pay these claims either.
Vultures eating the carcas of a dead animanThere’s usually hardly anything left when after paying the FDIC’s administrative expenses and the depositors. That leaves a lot of people who’re still hungry without much left on the bank’s carcass. You may see some Dividend on a portion of your allowed repudiation claim. And I may finally see the Chicago Cubs win a Word Series in my lifetime too. I like the understatement of any shareholder claim on a SUBROGATED FDIC DEPOSIT CLAIM. If anything, the WaMu case is highly unusual.
Well a couple of things:
- Why would DB litigate for years and years to negotiate a 3 billion claim in the fourth priority (at the level of subordinated debt) if they know they will never see a penny?
- Why is there a 151 billion fdic subrogated claim while there were no losses on the FDIC Deposit Insurance Fund? (Because all deposits went to JPM).
- Why does it show that 151 billion in dividends is paid out 100% to date? And paid to whom?
- Why is the amount of the subrogated claim (151 billion) roughly the same as 165 billion (amount of MBS Trusts) minus 13.8 billion in "other claimant's claims"?
- Why has the FDIC have to pay DB 3 billion and where on earth do they get the money from? (Hint: last friday's hearing)?
- Why was FDIC receiver mentioned specifically in WMILT's PR on escrows?
- Most important: why is FDIC receiver NOT released?
The 151 billion figure is no coincedence folks. It has been hidden in plain sight all along. This is the claim FDIC has (in favor of the WMI estate) against DB.
If otherwise, JPM was the one who would pay DB for their Trustee services, and NOT the FDIC.
And as Trustee, DB know exactly how much there was coming back to the FDIC and know in what ballpark figure they could milk the estate (DB started with 6 to 10 billion, remember?). DB wouldn't fight that hard, if they would know that there would not be much left to milk.
The rest is ours for the taking. Would have been all for the hedgies, if they weren't so darn greedy.