FDIC To Generate Revenues from Bank Bailouts - WSJ (NYB, EWBC)

The FDIC has been looking for new ways to generate revenues for years, and it just may have found one. While bailing out damaged banks is good, what if they become profitable again upon sale? Well, the FDIC is now asking bidders for some of the seized banks to allow them to profit if the turn around works out for the bank.

The FDIC recently collected $23.3 million from New York Community Bancorp (NYSE: NYB) as part of NYB's acquisition of AmTrust Bank. To gain an edge in bidding wars, NYB had a provision inserted that would allow the FDIC to collect upon the surge in NYB's stock price after the AmTrust purchase was announced. New York Community's stock rallied 16% for two weeks after the deal.

The FDIC recently missed out on East West Bancorp's (NASDAQ: EWBC) takeover of United Commercial Bank. The shares rallied 60% for two weeks afterward.

FDIC's insurance fund previously held $45.2 billion in June 2008, but has been wiped out after the massive bailout, and should stay in the red until 2012. The provision would only be used when takeovers involve publicly traded companies.

The NYB bid for AmTrust included an "equity-appreciation instrument" that gave the FDIC an opportunity to cash in if the bank's shares rallied after its deal. The mechanism came in the form of 25 million Units of New York Community that could be exchanged for cash or stock. The value was based on the difference between New York Community's closing price of $12.33 on the day of the deal and the price at a future point that would be no later than Dec. 23. Shares have held strong since the conversion, and NYB also issued 69 million new shares to pay for the acquisition.

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