With Cops Like These, No Robbers Need Apply

http://online.wsj.com/article/SB121641296022866029.html

I’m late on this.  But as the front-page article from the 7/21 WSJ didn’t elicit more blowback, here’s a little for good measure.

Apparently, when the FDIC took over Superior Bank in 2001, it pursued an atypical approach.  Rather than winding the bank down and selling off its assets, as is the agency’s usual game plan, FDIC  both continued to run the bank’s subprime portfolio and to make new subprime loans.  6,700 or so of them in fact, with aggregate value of over $550 million.  Since then, 12% of these borrowers have defaulted.

It gets better (or worse).  When the FDIC finally decided to unload the portfolio to Beal Bank of Houston, it did so without disclosing just how “sub” was subprime.  Subsequent to the sale, 1,500 of the 5,315 loans FDIC sold to Beal have either defaulted or are nonperforming.

In what must be a first, Beal is now suing the FDIC, whose internal counsel estimates it could be on the hook for as much as $70 million in damages. 

Lovely.  Regulator defrauds regulatee.  Man bites dog.  Actually, it’s a little more  like getting arsenic poisoning at the Police Benevolent bake sale.  In his defense, said a senior FDIC staffer:

Our job was to sell the assets of the institution and not to clean up the operations, per se, to make this a better bank.

Said differently, “our job was not to clean up the poo.  Our job was to try to move the poo to another, less visible part of the drinking water supply.”

Stuff like this only adds to my conviction that a bottoms-up look at the government’s financial regulatory infrastructure is long overdue:

http://tinyurl.com/jtonreg

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