Even though on the night of the failure we were sending notification to the deposit brokers that the bank had failed and (were) asking them to please submit documentation so we could process the claim. It was still taking them a tremendous length of time to do that. Now that we've had failures, brokers are used to it and they're tired of hearing customers clamor for their money.
Once we pay off the broker, they no longer earn interest. So what does the broker do? The broker either has to stop paying their clients interest, or the broker has to eat it and pay their clients the interest that they deserve. So they either have very angry clients or it's costing them a lot of money. So brokers have finally seen the light, and they're turning around their documentation much quicker than they had in the past.
What prompts you to give an acquiring bank a discount on some assets?
It depends on how the bid is submitted. Obviously, we'd like to get premiums. The trade-off of selling more assets is beneficial not only to the FDIC but also to the borrowers of the failed bank because it's going to keep the borrowers in a banking relationship. It's beneficial to the FDIC because we don't have to bear the administrative costs of servicing those loans, selling the loans and working with delinquent borrowers.
There is a cost associated with not only holding those loans but then selling them essentially out of liquidation prices. For people to take on the cost associated with servicing assets and dealing with troubled borrowers, we realize there's a cost there.
The negative bid is still beneficial dollar-wise to the FDIC because we have to take a look and enter into a transaction that's considered the least costly to us. That analysis is what would it cost to completely liquidate this bank, have no buyer, issue checks to depositors for their insured money, retain all the assets and then eventually sell those assets. We determine what that cost is and if anything beats that cost then we'll enter that transaction.
So even when you see a negative bid, if it beats our cost of liquidation, we're going to enter into it. But if there are other bids received and they have a smaller discount or even fall into the premium side, then that person offering the deeper discount isn't going to end up with the failing bank. There's a lot that goes into it but it is all bottom line driven. What is going to be the least cost to the insurance fund?
So far, only one bank hasn't been acquired.
That bank had nothing but ADC loans -- acquisition, development and construction loans -- which are the hardest loans to sell, and ones where we are seeing the steepest losses. More than 99 percent of the deposits were in the form of brokered deposits. There was absolutely zero franchise value, zero customer base and zero in the way of assets.