What happens to a bank's debt assets, if it fails and goes belly up

[Lowexpectations]

Originally Posted by NJ Brazen_3133

What kind of regulations do you need though? I mean, banks can short sale a house to people, or a boat.

Banks don't short sale a house they could accept less than the outstanding debt owed and settle. I'm not sure you understand how things work

[5ForksSC]

Originally Posted by NJ Brazen_3133

What happens to a Bank's debt assets, if it fails and goes belly up?

Banks loan out money to people, and people pay them back with interest. That is how they make money. The contracts are like assets, valuable assets.

Are these assets sold at a bargain price? Are only other banks that can buy them? Why cant the public buy them? Do these contracts ever get cancelled out leaving the debtors free and clear?

Assets can be, and are, sold to other institutions, typically in bulk. If there is no market for the asset ie unsecured loans the debt may be deemed uncollectable and charged off (I assume your are referring to the underlying promissory notes) If the institution has already taken possession of the underlying collateral of a secured loan, then it is typically offered for sale at fair market value. Usually through a 3rd party ie real estate sales firm

[weezerfan84]

Best bet is to have a bank nearby to assume the debt of the bank that is under a C&D. The assuming bank is either only going to take the marketable assets or take the whole portfolio at some dollar amount that's favorable to the assuming bank. The last thing the Gov't wants to do is take over a for profit lending institution, since that's not the Gov'ts specialty.


If the Gov't comes through with a C&D on your lending institution, you likely have a debt to deposit ratio over 1.00 and the loans aren't of average or marketable quality. Most banks come in to absorb the customer base on the deposit side and/or the software base on the operation side. Plus the discount for this is nice too. You've absorbed a percentage of your market base and potentially garnered updated software and improved efficiency at the same time.

[Rescue3]

Originally Posted by NJ Brazen_3133

How does the FDIC liquidate the debt asset? They just sell to another bank? Do they ever offer the debtor to pay it all off at once?

In my day, when the FDIC seized the asset (usually at 3:00 PM on a Friday), the asset was given to the Division of Liquidation. DOL assessed the asset and contacted the debtor advising the debtor that they now owed FDIC their payments because the FDIC now held the loan note.

If the note was performing well and matured in, say, under six months or so, the FDIC just held it. The debtor made his/her last six payments to the FDIC and then the note was marked paid in full.

If the note did not mature for much longer than that, it was usually bundled with other notes of similar performance and sold to investors. These investors sometimes were banks, and sometimes they were Wall Street firms or private financial firms. Purchasers of the notes had to sign a statement that they were not related to the debtor(s). FDIC sold performing notes of north of 0.90 cents on the dollar; I've seen absolute garbage (like a debtor who is in bankruptcy) sold for less than 0.30 cents on the dollar. Some notes are so bad they are simply written off - but that took special approval.

I have seen FDIC offer a debtor the opportunity to pay off the entire note at one time. When that happened, it was done on a case by case basis.

Keep in mind - I was associated with FDIC during the banking crisis of 1987 - 92. Some things might be a tad different now, but the basic concept remains the same.