As a bank teeters, the F.D.I.C. swoops in virtually overnight and shifts as many good loans and deposits as possible to a healthy bank.

TO BE NOTED:

"Disposing of Assets of Failed Banks Tests F.D.I.C.

By ERIC LIPTON

WASHINGTON — When regulators took over the First National Bank of Nevada last year, they faced a showdown with the Terrible Herbst, the mustachioed cowboy who boasts of being the “best bad man in the West.”

This was no real gunslinger, but the name and logo of a chain of gas stations and convenience stores in Nevada that feature slot machines next to candy and beer.

The family-owned Herbst chain, auditors at the Federal Deposit Insurance Corporation concluded, did not generate enough sales at its Reno-area gas stations to support the repayment of a loan, leaving auditors with three bad choices: Move to take over those stations and put the government in the gambling business. Cut off any flow of additional loan money. Or sell the loan at a steep loss.

The F.D.I.C. faces tough choices like this every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.

The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.

DebtX of Boston and First Financial Network of Oklahoma City, for instance, sell loans at auction to investors who typically pay 5 cents to 85 cents for each dollar of outstanding principal, according to Bliss A, Morris, First Financial’s president. It is unloading hundreds of houses across the country at bargain basement prices. In November, Lula Smith, 86, of Kansas City, Mo., bought a two-bedroom house across the street from her home for $4,000, one-tenth of its value two years ago.

“I am real satisfied with that price, yes sir,” she said, adding that after about $1,000 in additional costs to repair the house, and some new carpet, her son and daughter-in-law will move in. “It was a nice little deal, indeed.”

And — in the most closely watched tactic — the F.D.I.C. is negotiating a series of billion-dollar deals with private equity partners who will take over huge batches of loans in exchange for a chunk of the sale proceeds.

Even as the solutions to the financial crisis are debated in Congress and among economists, the F.D.I.C., one of the agencies that deals most closely with the nation’s banks, has already been transformed.

The rising tide of foreclosed real estate is so overwhelming that the agency, which had shrunk to a relatively tiny 4,800 employees from as many as 15,000 in the last period of bank meltdowns in the 1990s, is in the midst of a military-scale buildup as it undertakes one of the greatest fire sales of all time.

The agency is frantically calling in retirees and holding job fairs, looking to hire as many as 1,500 people. It has rented a high-rise office building in Irvine, Calif., the new headquarters for a West Coast branch of 450 employees who are wrestling with a real estate crisis in one of the hardest-hit regions. It is also budgeted to pay hundreds of millions of dollars for a small army of contractors to augment its staff. “We are trying to be ready for the inevitable,” said Mitchell L. Glassman, director of the F.D.I.C.’s division of resolutions and receiverships.

The budget for that division is increasing to $1 billion this year, from $75 million last year. Nearly $700 million of the increase is set to go to contractors like RSM McGladrey of Minneapolis, which provides temporary workers to help the agency close banks. These workers come at an hourly rate of $50 to $250. It is a high price, but the F.D.I.C contends the cost is much less than it would have to pay to hire permanent staff.

“It was so painful downsizing after the last banking crisis,” James Wigand, deputy director of the F.D.I.C. receivership division, said, referring to the layoffs after the last cycle of bank failures. “We’re really trying to avoid going through that again.”

The blitz by the F.D.I.C. may offer lessons for the Treasury Department, which is separately struggling with an even more monumental challenge: how to help still-operating banks move giant loads of toxic debt off their balance sheets, in the hope that the banks will begin taking risks again and stimulate the economy.

Tuesday, for example, is the deadline for online bids for $108 million in loans left from the default of Freedom Bank of Bradenton, Fla., which DebtX is selling at auction.

Particularly instructive for Treasury may be the partnerships the F.D.I.C. has formed with private equity groups and other profit-seeking investors, who are being given a chance to earn a big return in exchange for their help in managing billions of dollars worth of troubled loans acquired from defunct banks.

Last month, the F.D.I.C formed a partnership with a company called Private National Mortgage Acceptance Company, based in Calabasas, Calif., which paid $43 million to take possession of $560 million in loans left from First National Bank of Nevada. Private National, a company set up last year to profit from the bad-debt market, paid the equivalent of 38 cents on the dollar for the 3,800 loans, which were left after another bank took over First National’s branches and deposits.

The company will try to collect payments from borrowers after renegotiating mortgages, or, if necessary, foreclose on loans and sell the property. Private National said it hoped to make an annual profit of more than 20 percent for its investors.

Despite the small upfront price Private National paid, F.D.I.C. officials said they considered it a good deal. The government will receive, at least initially, 80 percent of any money Private National can generate from the loans.

As a bank teeters, the F.D.I.C. swoops in virtually overnight and shifts as many good loans and deposits as possible to a healthy bank. The F.D.I.C. persuades the healthy bank to accept some of the bad loans by agreeing to take a share of certain future losses.

What is left is a miserable stew of failed real estate projects, vacant land, boarded-up houses and loans to defunct or bankrupt businesses, among other stories of misery from these recessionary times. About 4 percent of the assets from bank closures last year were bad, totaling some $15 billion in loans and property that once belonged to institutions like the Douglass National Bank of Kansas City, Mo., and Sanderson State Bank of Sanderson, Tex.

This is the stuff that no healthy bank wanted to buy, losing propositions, or in the diplomatically bureaucratic language of government, “assets in liquidation”

The F.D.I.C.’s new workload is bringing back retirees like Gary Halloway, 58, of Spicewood, Tex., who has had assignments in seven states since he returned to work last year as the leader of regulatory SWAT team, moving from one failed bank to another.

“I wake up, I don’t know where I am, much less which time zone,” Mr. Halloway said in Jackson, Ga., last month, where he was working out of a former funeral home as he helped close First Georgia Community Bank.

Next stop: Houston, to work on the failure of Franklin Bank. “Sometimes I am driving on the highway and I see a sign and I even forget what state I am in,” he said.

For the F.D.I.C staff, the hardest part of taking control of failed banks may be deciding which outstanding loans to cut off, even in cases where perhaps a house development is only half built. Ending a loan almost certainly shuts down a project.

In the case of Terrible Herbst and its Reno-area gas stations, officials at the F.D.I.C. considered taking the highly unusual step of applying for a temporary casino license, allowing the agency to operate the gas stations and the electronic games after perhaps foreclosing on the nearly $10 million loan, one official involved in the effort said.

Another option, simply cutting off additional advances of cash from the loan, was ruled out because the business might close, making it nearly impossible to collect any of the outstanding principal.

The resolution of the case turned out to be a windfall for Terrible Herbst. The government put the loan on sale, and who should buy it directly from the government but the Herbst family, at a discount of more than 50 percent.

The government ate the loss, but at least it collected on some of the bad debt, the F.D.I.C. official involved in the deal said.

Executives at Terrible Herbst, who said they never formally refused to pay off the loan in full, were hardly disappointed.

“It worked out just fine," said Sean Higgins, the company’s general counsel. "At least for Terrible Herbst."