Show, don't tell, seems to be the Federal Deposit Insurance Corp.'s operating principle in a recent securitization. The agency's decision to pool $471 million of single-family mortgages from 16 failed banks and to sell them to institutional investors is not just a way of unloading assets from its books, it's also a way of showing the world that the securitization model still works for banks, despite changes to accounting rules that caused many to question its viability.

In the latest deal, the FDIC took a group of single-family mortgages from 16 banks it seized over the past 18 months and pooled them. It then sold $400 million of senior securities, backed by the loans, to institutional investors. The securities carried a 2.184% coupon, and although they were unrated, they were guaranteed by the FDIC, effectively giving them the backing of the U.S. government.

The securitization was then completed by the issuance of $71 million of subordinated certificates, consisting of a mezzanine tranche and an overcollateralization class, which were kept, at least initially, by the failed bank receiverships.

This is the first time the FDIC has securitized assets in the financial crisis, but it has done so before, specifically during the savings-and-loan crisis, when both the FDIC and the Resolution Trust Corp. used the structures to unload mortgages and loans to willing investors.

According to FDIC spokesman David Barr, the FDIC is rolling out the pilot securitization program only now because it took some time to collect enough unwanted assets to be able to create a structure large enough to entice large investors. "More than 90% of assets are sold at the time of failure," he says. "It was a matter of having the inventory."

There are also other motivations at work here: The FDIC is trying to show wary markets that new rules that change the way the FDIC treats bank securitizations won't hamper new securitizations. As Barr puts it, "Others can use this offering as a model for how to use a safe harbor."

All of this goes back to accounting rules 166 and 167, set by the Financial Accounting Standards Board in 2009. The rules amended existing rules for off-balance-sheet, special-purpose securitization vehicles and possibly forced banks to bring the SPVs back onto their books. That accounting change had a major affect on the FDIC's safe harbor rules. Under prior regulation, any assets held by an SPV created by a failed bank were outside the FDIC's reach because of their off-balance-sheet status. This gave investors in securitizations comfort that assets would be protected even if the originating bank got into trouble.

However, rule changes technically forced banks to return SPVs to their balance sheets and gave the FDIC the right to repudiate the bankruptcy-remote status of those vehicles. This threw into doubt rights to the assets of debtholders in SPVs if an originating bank failed.

Accordingly, the FDIC amended its safe harbor rules, first to grandfather securitizations done before March 31, then to propose a set of guidelines to ensure that complying banks would be entitled to safe harbor status for securitizations.

As the FDIC put it in the May 17 Federal Register, bankruptcy-remote securitization vehicles gone bad were one of the triggers of the crisis, and "it would be imprudent for the FDIC to provide consent or other clarification to its application of its receivership powers without imposing requirements designed to realign the incentives in the securitization process to avoid the devastating effects." The guidelines are numerous and include the stipulation that no securitization have more than six tranches, that it not be a resecuritization of an existing structure, that payments on securitized notes be based on actual payments to underlying bonds and that it not involve synthetic securities.

All this is laudable as the FDIC tries to find a middle ground between ensuring viable markets and ones that limit broader risk. However, the value of this recent test case is arguably limited.

One banking lawyer notes that the idea of the FDIC's structure being affected by bankruptcy is a moot point in the case of a structure backed by the full faith and credit of the U.S. government. "It's not like the government is going to go bankrupt," the lawyer says. At least, we hope not.

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