Is the IndyMac Deal a Little Too Sweet?

By PETER EAVIS Is the government charging too little for the remains of failed mortgage lender IndyMac? Friday, the FDIC announced it had approved the sale of IndyMac to a group of funds run by well-known investors, including John Paulson, who made a killing betting against the U.S. housing market. The positive interpretation of the deal is that savvy investors see a bottom forming in the mortgage market. The more skeptical view is that the buyers couldn't resist the sweet deal terms available. Associated Press FDIC employees are seen leaving the IndyMac Federal Bank headquarters in Pasadena, Calif., July 14, 2008. While the government deserves applause for quickly returning seized bank assets to private hands, it needs to ensure it doesn't spark controversy by underpricing. How does this deal stack up? The buyers are putting $1.3 billion of equity into a new bank that will hold IndyMac's assets and liabilities. The FDIC values the deal at $13.9 billion -- the amount of assets in the new bank. The FDIC's term sheet, however, says it's transferring to the new bank $16 billion of loans, $6.9 billion of securities as well as other assets -- far more than $13.9 billion. This suggests big write-downs will occur at the time of the deal to get the new bank's assets down to $13.9 billion. Such write-downs would help the buyers. Substantial losses would effectively be taken on the assets before the buyers own them. There are other nice-looking facets to the deal. A loss-sharing arrangement with the FDIC limits the buyers' potential losses on the transferred assets. And the agency is continuing to provide secured financing on these assets. There is one potential headache for the buyers. To qualify for the loss-sharing, they must continue a loan-modification scheme that the FDIC set up at IndyMac as the centerpiece of its anti-foreclosure efforts. This scheme could be costly to run -- and may not reduce foreclosures meaningfully because it doesn't focus on cutting the amount borrowers owe. Even so, the deal looks good for the buyers. Perhaps a little too good.