Southwest's Problems Could Drain FDIC Fund / 1988 'Year of Big Hits'

By Nathaniel C. Nash, Ny Times | THE JOURNAL RECORD, March 18, 1988 | Go to article overview

Southwest's Problems Could Drain FDIC Fund / 1988 'Year of Big Hits'


Nathaniel C. Nash, Ny Times, THE JOURNAL RECORD


problems in the depressed Southwest have become so acute, banking experts say, that they could create the largest one-year drain in history on the government agency that insures deposits at the nation's banks.

Some officials of the Federal Deposit Insurance Corp., with the $1 billion bailout of First RepublicBank Corp. underway, are estimating that the agency could end up paying as much as $4 billion this year to solve banking problems in Texas alone.

While such losses would not deal the $18 billion fund that insures deposits at the nation's banks a crippling blow, says FDIC Chairman L. William Seidman, the losses would represent the biggest one-year financial drain the agency has endured in years and could leave the FDIC with total assets of less than $16 billion, the officials say.

Moreover, analysts are predicting that the agency would likely come under pressure to begin rebuilding those lost resources early next year by imposing higher insurance premiums on the banking system.

``This is a year of big hits for the FDIC,'' said James J. McDermott Jr., a bank analyst at the firm of Keefe, Bruyette & Woods.

``After the government cleanup in Texas, the banking industry may face one of two options - higher insurance premiums or imposing premiums on foreign deposits,'' said Lawrence W. Cohn, senior banking analyst for the Merrill Lynch Capital Markets Group.

The immediate trouble facing the FDIC involves the failure, or near-failure, of two of the largest commercial banking institutions in Texas: the First RepublicBank Corp. and the First City Bancorporation of Texas Inc.

Both banks have been hurt by bad energy and real estate loans. Dallas-based First RepublicBank, the state's largest banking company, with $33.2 billion in assets, announced on Tuesday that its financial condition had reached such a state that it had asked the FDIC for aid. On Thursday, the FDIC agreed to a $1 billion capital infusion which officials said could grow.

Meanwhile, First City, based in Houston, with assets of $12 billion, is having trouble persuading its bondholders to accept a 1987 rescue plan that would pay them 35 to 45 cents on the dollar for the debt securities.

According to Seidman, the agency took about a $1 billion loss on the First City bailout plan last year. He said that if any aspects of that plan were eventually renegotiated, the extra cost to the agency would be nominal or nil. But despite the lack of added costs, the First City case has again drawn attention to banking problems in Texas, raising fears of a further loss of confidence.

Concerning the First RepublicBank rescue, Seidman conceded that even the most favorable deal for the agency would be costly. First RepublicBank has almost $4 billion in non-performing loans, and other banking experts have estimated that to attract a potential buyer for the bank, the FDIC would have to inject $2 billion to $3 billion of its own funds.

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