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The New M&A
The New M&A
The banking industry is in the midst of a major consolidation phase that is likely to reduce the number
of banks by at industry percent between 2009-2015. Thisphase that is likely to reduce the to the
The banking least 25 is in the midst of a consolidation consolidation will be realized due
number of failed banks taken 25 percent before the end of the decade. This merger and acquirisition of
number of banks by at least over by the FDIC, sold by the FDIC, and by consolidation
troubled realized due Bank merger and failed banksactivity willby the FDIC, sold by during 2010 -2011.
will be institutions. to the number of acquisition taken over rise to record levels the
The bankingby mergeris undergoing a restructuring and a major exodus back to community banking
FDIC, and industry and acquirisition of troubled institutions. Bank merger and
models coupled withwill rise to record levels during 2010 -2011. The banking industry is
acquisition activity associated conservative risk management maxims.
undergoing a restructuring and an major exodus back to community banking principles
The number ofassociated risk management maxims.
coupled with failed banks is likely to exceed 500 between 2010-2011 alone. This presents an
opportunity to acquire banks at such an undervaluation as to be almost a steal. Banks deposits are
selling at a premium ofbanks is likely to exceed 500 between 2010-2011 alone. This
The number of failed 0 – 1.5%. Assets maybe cherry picked and insured by the FDIC under an 80/20
Loss Share Agreement. Recent acquisitions have proven that banks may be purchasedsteal.
presents an opportunity to acquire banks at such an undervaluation as to be almost a for pennies on
the dollar, with the net result of premium of 0 – 1.5%. Assets maybe cherry of 50% and
Banks deposits are selling at a deposit increases of 75% +, asset increases picked +, increase in
offices/branchesFDIC under animmediate market share at the stroke of a pen.
insured by the of 40%+ and 80/20 Loss Share Agreement. Recent acquisitions have
proven that banks may be purchased for pennies on the dollar, with the net result of
Enclosedincreases a few related banking articles in which the reader will see the validity of the
deposit are only of 75% +, asset increases of 50% +, increase in offices/branches of
40%+ and immediate market share at the stroke of a pen.
aforementioned introductory statements. The opportunity is now and on a diminishing timeline of
opportunity. A number of the articles will define the opportunity, reinforce the opportunity, present the
players/investors and provide keen insight.
Enclosed are only a few related banking articles in which the reader will see the validity
of the aforementioned introductory statements. The opportunity is now and on a
diminishing timeline of opportunity. A number of the articles will define the opportunity,
reinforce the opportunity, present the players/investors and provide keen insight.
Article 1:Florida Deal a Microcosm of New M&A -American Banker 12/10/09 -Page
Article 2: AmTrust reopens, name unchanged -Ackron Beacon Journal 12/06/09- Page 7
Article 3: Prepping for The Weekend: Buying Banks from the FDIC -BAI 12/01/09-Page 9
Article 4: Multiple Charters Under More Pressure-American Banker 11/23/09-Page 12
Article 5: Texas billionaire trolling for failed Florida Banks-Herald Tribune 11/21/09-
Article 6:Banking woes seen by La. Company as opportunity-AP 11/19/09-Page 16
Article 7: This bank is suddenly a player in Florida-Herald Tribune 11/18/09-Page 18
Article 8: FDIC Board Adopts Proposed Interim Final Rule To Provide A
Transitional Safe Harbor For All Participations And Securitizations FDIC Press
Release 11/13/09- Page 20
Article 9: Robust M&A activity lies ahead, but FDIC deals are near-term focus Bank
& Thrift 11/13/09- Page 21
Article 10: Remarks by FDIC Chairman Sheila Bair at the Institute of International
Bankers Conference; New York, NY-FDIC Press Release 11/10/09- Page 23
Article 11:Small Banks Dip Toes into IPO Waters -AmericanBanker 10/24/09Page 29
Article 12: Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance
Corporation on Examining the State of the Banking Industry before the
Subcommittee on Financial Institutions, Committee on Banking, Housing and
Urban Affairs, U.S. Senate, Room 538, Dirksen Senate Office Building FDIC Press
Release 10/19/09- Page 31
Article 13: Bank failures create regional winners-Market Watch 10/16/09-Page 41
Article 14: FDIC Approves Rules for Private Equity Buying Banks Private Equity
Council 10/12/09- Page 44
Article 15: Firms poised to bet billions on real estate-Herald Tribune10/12/09Page 46
Article 16: Man on a Mission -US Banker 10/10/09- Page 51
Article 17: Ross Gets Nod for a Bank Charter-Wall Street Journal 9/11/09-Page 55
Article 18: The FDIC's Statement Of Policy On Qualifications For Failed Bank
Acquisitions-Cadwalader, Wickersham & Taft LLP 8/13/09- Page 58
Article 19: Preparing for a major bank shakeout-CNN Money 8/28/09-Page 66
Article 20 & 21: FDIC soften bank investment restrictions & FDIC to soften stance,
luring private capital -Reuters 8/26/09-Pages 69 & 70
Article 22: FDIC may ease private equity buys of failed banks-AP 8/20/09-Page 73
Article 23: FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank
Acquisitions-FDIC Press Release 7/2/09-Page 75
Article 24: Psst! Wanna own a bit of a failed bank?-CNN Money 6/30/09-Page 77
Article 25:Treasury’s Bill Gross on Speed Dial-Wallstreet Journal 6/20/09-Page 82
Article 26: Banking on opportunity-Boston Globe 5/08/09-Page -98
Article 27: Planning and Executing a Successful Troubled Bank Acquisition Western
Independent Bankers 4/01/09- Page 100
Article 28: How Many to Fail; Do We Hear 1,000?-American Banker 3/24/09- Page 103
Article 29: Carlyle Group Said to Raise $1 Billion to Buy Stakes in Banks-Bloomberg 2/15/09
Article 30: Failed banks for sale...who's buying?-CNN Money 12/19/08-Page 108
Article 31: Insiders Reap Huge Profits on Purchase of Failed South Carolina
Bank-Problem Bank List-Page 111-113
Article 32: Bank big shots eying Ga. apply to start bank in Fla.-Tampa Bay Journal-
April 9, 2010-Page 115-116
Article 33: A rush to buy failed Florida banks: Miami Herald-04-10-2010
December 10, 2009
Florida Deal a Microcosm of New M&A
By Marissa Fajt
When a group of would-be bank organizers recently landed a small Florida institution, they
were foreshadowing the near-term future of industry M&A.
Frustrated by a wait for a charter, Apollo Bancshares went hunting for a small bank in its
target market of south Florida. It found such a launch vehicle in Miami, where Union Credit
Bank was willing to give up a controlling stake in return for a recapitalization. Apollo agreed
to buy that stake in the $154 million-asset Union Credit for $15 million.
The Apollo team had formed early last year to start a south Florida bank from scratch and
applied for a license in mid-2008. But federal regulators made obtaining deposit insurance
too difficult, and in March of this year Apollo started shopping for small acquisitions.
"The opportunity changed - the de novo scenario became less attractive. To work with the
regulatory process was longer, which meant more expensive, and the requirements laid out
once we open were a lot more complicated and going to affect our investment. The
opportunity to acquire a bank became more attractive," said Eduardo Arriola, Apollo's
chairman and chief executive.
Industry watchers said they expect more of the same in the coming year.
"We are not going to see a lot of traditional M&A," said Rusty LaForge, a lawyer at McAfee &
Taft in Oklahoma City.
"As bank failures come along, we are going to see traditional buyers are going to sit and
watch for those failures," LaForge said.
"But these organizing groups can't get into a failure as easily, and those organizing groups
know they can't get FDIC approval for new insurance. So they are who we see buying banks.
That is their only way to get a hold of a charter, and I don't see anything that would cause it
to change for next year."
As for true start-ups, "I think they are going to get to the point that I doubt we see any in the
next year," said Byron Richardson, the president and CEO of Bank Resources Inc., a
consulting and investment banking firm in Atlanta.
"If you see one or two new banks in the coming year, they will be the exceptions. More often,
individuals who want to get into the banking business are going to buy control or 100% of
Usually these erstwhile start-ups look for targets with few credit problems, investment
"They tell us, 'We want the smallest, cleanest bank you can sell us,' " said Wes Brown, a
managing director for St. Charles Capital in Denver.
The smaller the bank, he noted, the less risk associated with the loan portfolio that is
acquired with it.
"They are willing to pay a premium for that. They plan to branch from that initial market into
their market. Generally, they want to buy a bank in the state they are going to operate in, but
not necessarily in the area they are going to operate in."
Union Credit, founded in 2001, may have been the cleanest bank Apollo could find, given
that it was looking in troubled Florida. But the bank is not quite pristine. Its net loss swelled
to $3.8 million in the third quarter from $94,000 a year earlier.
Union Credit's total risk-based capital ratio dropped over the same period from 21.59% to
9.55% - 45 basis points below the threshold regulators consider well capitalized.
Nonperforming loans jumped from 1.81% of the bank's portfolio to 6.88%. The average for
Florida banks with assets of $100 million to $300 million was 6.04% at the end of the third
Arriola said Apollo talked to more than 30 banks in the southern Florida market that were
interested in selling, before deciding on Union Credit.
"They weren't truly a troubled bank," he said. "They weren't on the FDIC watch list. The
capital came down, but it was a yellow light, not a red light. They had just come under the
well-capitalized ratio ... and our coming in with capital addresses that immediately."
Around the country, other organizing groups have been making decisions similar to the one
the Apollo group made. For example, organizers of what would have been the biggest start-
up bank in Virginia, Xenith Corp. in Richmond, struck a deal instead in May to acquire the
$175 million-asset First Bankshares Inc. in Suffolk, Va., after they couldn't get over
regulatory obstacles. And AustinBancshares Inc. agreed to buy La Grange Bancshares Inc.,
the parent of the $29 million-asset Colorado Valley Bank, for similar reasons.
Roughly 25 banks have opened this year, versus 95 in 2008, according to Federal data.
(The agency has repeatedly said there is no moratorium, formal or otherwise, on new deposit
Overall, bank merger and acquisition activity has also slowed considerably this year.
According to the investment bank Carson Medlin Co., 139 bank deals have been announced
this year, down from 179 in all of last year and 322 in 2007. (The tally includes
recapitalizations and excludes deals that were later canceled.)
Recapitalizations are hardly confined to Union Credit or south Florida - or to investors that
shelved start-up plans.
Other recent examples include a $40 million infusion that a group of private-equity firms
made in Three Shores Bancorp., the parent company of Seaside National Bank and Trust in
Orlando, in central Florida; and Ohio Legacy Corp.'s deal to sell a majority stake to Excel
Financial LLC for $15 million.
Besides returning Union Credit to well-capitalized status, its seller, a wealthy Chilean family,
also wanted to find a partner so it could resume growth after several years of stagnation,
The deal was announced last week and is expected to close in the first quarter.
Charlie Crowley, a managing director in investment banking at Stifel, Nicolaus & Co. Inc.,
said there was a similar lull in traditional M&A during the savings and loan crisis in the late
1980s and early 1990s.
A rebound followed, and the same could happen after this slow period, Crowley said. "What
we saw 20 years ago is once the FDIC had done a fair amount of the cleanup and after the
healthier part of the industry became stronger, there was a little bit of pent-up demand
among both buyers and sellers, and that led to a fairly prolonged period of M&A activity," he
said. "We wouldn't be surprised to see that again, but it will be a while."
Before M&A activity picks up, Crowley said, bank valuations will have to increase - both for
the stock that buyers use as currency and the prices sellers expect.
Also, overall confidence in loan portfolios will need to improve before buyers are willing to
take on other companies' loans, Crowley said.
"It is better than it was six or nine months ago, but we still need a fair deal of healing in the
real estate environment and the industry, and then it will pick up a lot," he said.
AmTrust reopens, name unchanged
New ownership says Cleveland headquarters, all 66 branches still in business.
By Teresa Dixon Murray
Plain Dealer Reporter
Published on Sunday, Dec 06, 2009
The new owners of AmTrust Bank plan to keep all branches open with the same name and employees and
the Cleveland headquarters.
AmTrust Bank, which opened with one office on Valentine's Day 120 years ago and grew to one of the
nation's 100 largest banks, was seized by federal regulators Friday and bought by New York Community
Bank of Westbury, N.Y.
Branches reopened on Saturday.
New York Community Bank Chairman and Chief Executive Joseph Ficalora said in an interview that the
bank plans to keep all 66 AmTrust branches open, keep the Cleveland headquarters and keep all the branch
employees, at least for the foreseeable future.
''We have a great deal of confidence in the people who've been doing the job,'' Ficalora said. ''We are
definitely interested in working with them to make the bank the larger bank it once was.''
Branch employees are critical, he said. ''The thing we most appreciate is the relationship that's established''
between customers and employees they know. As for management, ''those decisions will be made person-
by-person,'' he said.
New York Community Bank also plans to keep the AmTrust name. The bank will be known as AmTrust, a
division of NYCB.
AmTrust is the first Northeast Ohio bank to fail since TransOhio Federal Savings Bank of Cleveland was
seized 17 years ago. AmTrust, the latest calamity in the nation's two-year-old banking crisis, became the
128th bank to fail this year, and the second in Ohio. Six banks in all failed Friday, bringing the year's total to
130. With assets of $12 billion, AmTrust was the fourth-largest to fail this year.
New York Community Bank, one of the nation's 25 largest banks and one of its strongest, paid nothing to
take over AmTrust's $8 billion in deposits, which indicates AmTrust was essentially worth nothing, analysts
said. About 77 percent of the privately owned bank was held by the Goldberg family, which had controlled it
for nearly five decades.
While the closure is not surprising — given the parent company's bankruptcy filing last week — it is still
stunning to the bank's 280,000 local customers, 1,400 local employees and a community that had watched
the sleepy thrift become a national powerhouse and an important philanthropic force across Northeast Ohio.
For most customers, there's no issue in the short term. ''Depositors are not losing a penny,'' said FDIC
spokesman David Barr.
Customers can access the money in their accounts as usual through ATM/debit cards or by writing checks in
the branches. Direct deposits and payments already scheduled will continue as if nothing had changed.
Customers who have questions can call the FDIC toll-free at 1-800-450-5143 from noon to 6 p.m. today.
The main group who will be affected are those who had loan applications in process. They could get stalled
While depositors aren't losing anything, the FDIC fund is taking an estimated $2 billion hit, Barr said. The
FDIC entered into an agreement to cap New York Community Bank's potential losses on the loans it's
buying. NYCB agreed to buy about $9 billion in AmTrust assets. The FDIC will keep the remaining $3 billion
in loans to sell later.
Among the nation's 8,100 banks, AmTrust was the 92nd largest as of June 30. At its height, it was the 68th
largest in 2006 and 2007. In the last two years it's lost nearly 40 percent of its assets and deposits as its
loans lost value, CDs matured and customers left. AmTrust was simply into mortgage lending too deep,
much of it risky or in markets that were about to implode.
''It's a terribly tragic situation but they weren't alone in the problem,'' said Karen Hopper Wruck, a finance
and banking professor at the Ohio State University's Fisher College of Business.
AmTrust's failure follows its financial report two weeks ago that showed the bank was spiraling toward
insolvency. The bank's parent company, AmTrust Financial Corp., filed for bankruptcy on Monday. The bank
was not included because banks can't file for bankruptcy protection.
Banking analyst Terry McEvoy of Oppenheimer & Co. in Maine said NYCB is a bit of a surprise because the
bank had no presence in Ohio, Florida or Arizona, the three markets where AmTrust has branches. But he
said NYCB is ''highly regarded.''
AmTrust has 25 branches in Cleveland and Akron, 25 in Florida and 16 in Arizona.
Michael Van Buskirk, president and CEO of the Ohio Bankers League, an industry trade group, said it's
better for the region that AmTrust was bought by a bank with no local presence. The purchase by a bank
with existing branches might have meant big losses in jobs and branches. ''I think this is a positive for
Prepping for The Weekend: Buying Banks from the FDIC
Buying failed banks from the regulators can bring growth at a cheap price – but only if acquirers
do their homework first.
BY SHAHAB CHOUDHRY AND CHRISTOPHER P. TERILLI BAI BANKING STEATEGIES
Dec 1, 2009
There has never been a better time for growth-hungry banks to find bargains. That’s a fact.
Failing banks abound, and some once-active acquirers are pushing back from the table, leaving
the Federal Deposit Insurance Corp. (FDIC) in a bargaining mood.
But here’s another fact: with the oversupply of distressed banks, there has never been a better
time for caveat emptor. While failed banks may tantalize with attractive price tags, buyers also
need to see the failed institution behind the paint job. These banks are failures because they
have things wrong with them. And that makes them risky.
On the other hand, the FDIC is eager to price accordingly and mitigate the risk via loss-share
agreements and good asset/bad asset separations. So how does a prudent bank look over the
landscape, identify valuable assets at great prices and prepare to participate wisely and
confidently in the bidding process?
Many healthy banks can rightly claim to be M&A experts after decades of participating in the
industry’s consolidation, successfully integrating one acquisition after another. How different can
an FDIC-assisted transaction be?
The answer lies in the FDIC’s own charter: Restore public confidence… Promote the safety and
soundness of the nation’s banking system…. What we call an acquisition, the FDIC calls a
“divestiture.” Its divestiture process, like its seizure process, is geared to bolstering public
confidence. The agency needs to be confident that each divestiture fulfills the spirit of its charter
and produces a healthy institution.
Keeping those points in mind, we recommend that banks entering into FDIC-assisted transactions
embrace a three-part approach:
1. Put “resourceful” in front of “due diligence.”
For traditional acquisitions, bank acquirers have developed a crisp and thorough expertise in due
diligence. They know what to ask, where to find the answers and how to analyze the information.
They take the time to go to the source, get the right data and validate it.
In an FDIC divestiture, by contrast, acquirers receive slim packets of distilled data about the
target; they are not allowed to contact the failing bank for additional information. This leaves
prospective acquirers with myriad questions and no traditional avenues for getting them
answered. What customer strategy has this bank pursued? What was their pricing strategy? How
much customer traffic do they get at their branches? What is their corporate culture? Why do
people bank with them? Have they been losing or gaining customers recently?
And then there’s the ultimate question that is absolutely core to any prudent decision: Why did
this institution fail?
Resourceful due diligence means finding novel ways of getting those questions answered.
Secrecy and discretion are paramount, ruling out most ordinary research via conversations with
the failed bank’s competitors, customers, vendors and others familiar with the target bank.
Instead, acquirers must be resourceful in seeking out available existing data and research on real
estate, demographics, market economics, etc. For example, to gain added insight into the make-
up of the customer base, it is helpful to tap the local newspapers for historical research on the
bank’s marketing and advertising campaigns. The failed bank’s servicer can also be a source of
detailed information, often at a price.
2. Have a Great Weekend.
Caveat emptor or not, FDIC divestitures usually allow prospective acquirers less than 30 days to
prepare their bids, a breathtaking pace even for experienced acquirers whose well-oiled M&A
machines can make quick work of traditional acquisitions. Traditional acquirers can also, if
business or technical conditions allow, delay a conversion date to effect the cleanest conversion
possible with minimal customer impact. It is not unusual for a conversion of bank systems to take
place a full year after an announcement.
But for the FDIC, speed and customer impact go hand-in-hand. The faster the customer can
become a customer of a real bank rather than the FDIC, the faster confidence is restored. This
imperative usually rules out a methodical assessment of resources, systems and products. It also
rules out the traditional staged communications plans carefully calibrated by acquirers to soothe
employees and shareholders of the acquired institution.
Instead, it’s all about The Weekend. Between the Friday announcement of the seizure and the
failed bank’s reopening on Monday morning under new ownership, an extraordinary number of
decisions must be made and executed, among them a communications plan designed to instill
public and customer confidence. The last thing the acquirer or the FDIC wants to see on Monday
is a line of customers anxious to move their accounts to a “safer” bank. If the public is not
confident, the FDIC’s mission fails. If customers depart in droves, the acquirer’s mission fails.
No surprise that the FDIC’s normal interest in a speedy turnover has been heightened lately. As
of this writing, regulators have seized 98 banks this year, with new failures announced every
Friday. No one sees this trend abating. Having already had to raise premiums and impose a
special assessment on its members to pay off depositors, the FDIC cannot afford to stay in the
business of running failed banks any longer than is absolutely necessary. When assessing
potential acquirers of failed institutions, the FDIC is certain to gauge their commitment to a rapid
3. Demonstrate a new kind of M&A readiness.
This is a new field of competition, calling for a new kind of competence. Before making a bid and
getting caught up in an unfamiliar process, interested banks need to revisit their current M&A
readiness plans and create one geared to FDIC transactions.
Traditionally, acquirers have been at pains to show how they would treat management and
employees of acquired banks, increase the bank’s value for shareholders, maintain the quality of
service for customers, leverage its technology innovations and so on.
But the FDIC has three main questions: How high is your bid? Do you have the capital strength to
carry it out? Can you take over and operate the failed bank on The Weekend?
Buried in the last question are the questions that top managers of prospective acquirers must ask
themselves: If the deal of the century were to surface soon, are we ready to take advantage of it?
Before we can convince the FDIC, can we convince our board – and, yes, ourselves – that we
have what it takes to succeed in this high stakes business?
Can we, for example, assemble the infrastructure for servicing a sudden increase in troubled
assets? Can we handle the expected customer retention challenges? Can we quickly decide
whether our best strategy in a given situation is to completely integrate the failed bank, run it as a
standalone or simply buy the deposits and get rid of everything else? Can we handle the added
real estate challenges? Can we operate effectively in this new, fast-paced environment?
Bidders on FDIC divestitures increasingly line up partners to help them fill experience gaps and
give the FDIC confidence that, when choosing a winner, they will resolve a failed bank, not create
another larger problem.
Growth will never be this affordable again. The past twelve months have produced a steady
accumulation of expertise on this subject. Healthy banks need not shy away because the risks
are unfamiliar or because the prospect of The Weekend is daunting. For the present, at least, this
is one of the most important fields of competition. The results will reshape the competitive
landscape and the payoff for the winners will be long-lasting.
Mr. Choudhry is the managing partner, M&A Solutions, with Morristown, N.J.-based Collabera
Inc. and can be reached at firstname.lastname@example.org. Mr. Terilli is the vice president,
professional services, with Quincy, Mass.-based ADS Financial Services and can be reached
November 23, 2009 By Paul Davis
Multiple Charters Under More Pressure
The decentralized banking model, which has been losing favor for years, may be killed off by
Leaving decisions to local executives who knew their markets, the thinking went, would allow
big lenders to be nimble and small ones to grow. But a stricter, more streamlined regulatory
system and second-guessing of the credit-granting processes are forcing change.
Executives at companies such as Fulton Financial Corp. and Synovus Financial Corp. say
they have not given up on their longtime models, but many say the strategy of using lots of
charters and letting front-line managers make tough decisions might become another
casualty of the financial crisis.
"The future of decentralized banking is a legitimate question," said Kevin Fitzsimmons, an
analyst at Sandler O'Neill & Partners LP. "I don't think the model is dead, but it has been
dealt a harsh blow. It will be harder to justify due to new regulatory and capital burdens."
Government responses to the crisis present the biggest challenge to decentralized models,
especially legislation that would create a single bank regulator.
"If we have one monstrous regulator, there would be no point to having separate
banks," Fitzsimmons said. "It raises the question of whether such a structure would be
Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., agreed.
"The biggest challenge will be on the regulatory side," he said. "It is more expensive to run a
Another strike against the model is the perception that decentralized banking may have
exposed companies to more problems leading up to the financial crisis partly because of
inconsistent and at times lax lending standards. Likewise, some are concerned that the model
may have prevented banking companies from reacting swiftly to tackle problems.
The former GB&T Bancshares Inc. in Gainesville, Ga., reported in early 2007 that one of its
bank presidents had failed to comply with a number of company policies and procedures,
including collateral requirements. The president was fired and within a year GB&T sold itself
to SunTrust Banks Inc.
Another mounting concern is that undercapitalized banks could offset gains at healthier
affiliates, forcing companies to shift capital around or weakening the overall strength of the
parent. The model received its darkest black eye earlier this month when the Federal
Deposit Insurance Corp. seized the $19 billion-asset FBOP Corp. Several of the Oak Park, Ill.,
company's nine banks were undercapitalized, including its biggest subsidiary, California
National Bank, which weighed heavily against its healthier banks. U.S. Bancorp bought all
nine banks Nov. 2.
Richard Anthony, the chairman and CEO at Synovus,, has acknowledged the Columbus, Ga.,
company's model may have contributed to credit problems.
"Some of the growth we had in construction and development [lending] that was more than
we really wanted ... has been because of the decentralized model," he said during an August
2008 conference hosted by Keefe, Bruyette & Woods Inc.
Still, Anthony disagrees that the model kept Synovus from taking prompt action to confront
issues. Local CEOs have been critical to helping Synovus identify and vet local investors
interested in buying distressed real estate. Selling to local buyers has yielded pricing that on
average is 30% higher than bulk sales to outsiders, according to company data.
"In some ways we did act pretty quickly," Anthony said in an interview. "Particularly in
Florida, we did take some decisive action."
Capitol Bancorp Ltd. of Lansing, Mich., may be the most noticeable convert.
In March, Capitol combined nine banks in Michigan as part of a plan to spin them off into a
new company, Michigan Bancorp Ltd. The move, which is still under regulatory review,
would relegate about a third of Capitol's nonperforming assets to the new entity, while also
slightly raising Capitol's capital levels.
Capitol has eliminated 13 charters since mid-2008, slimming to 51 charters by consolidating
banks or selling them. Last week the $5.3 billion-asset company sold Bank of Santa
Barbara to investors.
Synovus has shrunk to 30 charters from more than 40 in 2005. It also tightened up in recent
years, implementing consistent standards and placing credit administration and senior credit
officers in its worst-hit regions.
Executives who still embrace the model feel it fulfills two key objectives of banking:
empowering employees and developing strong relationships with clients. "When they retain
their bank's name, it sends a message from corporate that they are still in charge," said R.
Scott Smith Jr., Fulton's chairman, president and CEO. "It brings responsibility and
Fulton Financial, of Lancaster, Pa., merged three of its Maryland banks this summer, leaving
the $16.6 billion-asset company with eight banks.
Decentralized models can boost deposit gathering and liquidity because they can offer the
$250,000 deposit insurance limit across multiple banks.
Wintrust Financial Corp. of Lake Forest, Ill., has promoted a MaxSafe money market product
that allows customers to have account balances across the $12.1 billion-asset company's 15
bank charters. Anthony at Synovus said his company holds about $2 billion in pooled
deposits that are held at multiple banks.
Smith said Fulton's ability to offer more deposit insurance to individual clients proved
beneficial during last year's financial crisis. "It was a nice way to hold on to customers'
deposits and keep them from going somewhere else," he said.
Texas billionaire trolling for failed Florida banks
Companies are out to buy sick banks, like IberiaBank last week bought Century Bank, headquartered in downtown Sarasota.HERALD-
TRIBUNE ARCHIVE / 2009
By John Hielscher
Published: Monday, November 23, 2009 at 1:00 a.m.
Last Modified: Saturday, November 21, 2009 at 5:43 p.m.
A BILLIONAIRE TEXAS BANKER received swift approval from Florida banking regulators to buy
failed or ailing banks.
The Florida Office of Financial Regulation issued an emergency order this month for Andrew Beal,
giving him authority to charter a new Florida bank that would acquire failed or failing banks.
Beal is the chief executive and sole owner of Beal Financial Corp., a Plano, Texas, company that owns
Beal Banks in that state and Nevada.
Forbes magazine recently called him the 52nd richest person in America, with a net worth of $4.5
billion. He can definitely cover the tab for a few failed banks.
Beal and associate M. Molly Curl applied for a Florida bank charter on Oct. 19 and won approval on
Nov. 5, less than three weeks later. New bank charters typically take months to review and approve.
Beal was rumored to be a possible buyer of either Century Bank of Sarasota or Orion Bank of Naples,
both of which failed on Nov. 13. Those banks were sold to IberiaBank of Lafayette, La.
Beal Bank of Plano, at $2.5 billion in assets, and Beal Bank Nevada, at $5.5 billion, aren't typical
retail banks with checking and savings accounts. They are wholesale banks that buy troubled loans, at
cheap prices, from banks or regulators.
Beal isn't the only big-money name looking to make a deal on failed banks in Florida.
Miami Dolphins owner Stephen Ross and two executives from his Related Cos. have formed a new
bank to bid on sick banks.
SJB National Bank has been approved by the Federal Deposit Insurance Corp. to bid on banking
operations of failed lenders.
High cost of Coast
First Banks Inc. bought Bradenton's Coast Bank for a bargain-basement price in late 2007, but Coast
is proving costly today.
Nearly one-fourth of the Florida mortgage portfolio First Banks acquired from Coast is delinquent or
restructured, the bank said in a regulatory filing last week.
On Sept. 30, the bank reported $29.6 million in nonaccrual loans, $7.6 million in loans 30 to 89 days
past due and $8.5 million in restructured loans.
The has bank charged off $26.5 million of the Florida loans so far this year.
First Banks, a privately held company based in suburban St. Louis, knew it was taking on problems
when it bought Coast. The Bradenton bank was near failure after loan losses depleted its capital, and it
was mired in a lending scandal involving its chief lender and a home builder. That executive, Philip
Coon, has pleaded guilty to loan fraud and is awaiting sentencing.
Foxworthy on Trust board
Ron Foxworthy has joined the board of directors of Trust Companies of America, the parent of
Caldwell Trust Co. of Venice.
He is filling the term of Jack Meyerhoff, a Caldwell Trust founder who died in September.
Foxworthy started Rusty Plumbing Inc. and operated it until 1999. He also was a residential and
commercial developer and served as a director of a number of local banks. He was a founder of The
Suncoast Foundation for Handicapped Children.
November 19, 2009
Banking woes seen by La. company as
By ALAN SAYRE
AP Business Writer
A Louisiana banking company sees the worst rash of bank failures in two decades as fertile
ground to expand well beyond the state line.
Two Florida banks recently acquired by Iberiabank Corp. may be only the start for the
Lafayette-based company. Analysts say the takeovers — which doubled Iberiabank's asset
base — will likely be emulated by other companies as smaller banks fail and megabanks
reduce their loan exposure in states with real estate problems.
So far this year, there have been 123 U.S. bank closures.
"What you're going to have is a void of decent size banks that can loan," said Michael Rose,
industry analyst for Raymond James.
On Nov. 13, after the Federal Deposit Insurance Corp. shuttered Naples, Fla.-based Orion
Bank and Sarasota, Fla.-based Century Bank, Iberiabank assumed $3.1 billion in assets,
$2.5 billion in loans and $2.5 billion in deposits, along with 34 banking offices in six Florida
metropolitan areas. Loss-share agreement with the FDIC put the company's maximum
exposure at $252 million. Overnight, the company with the Louisiana name became Florida's
20th-largest bank in deposits.
During a conference call with analysts after the takeover, Iberiabank chief executive Daryl
Byrd said the "right time, price and risk structure" paved the way for his company to step into
"They got to grow about 45 percent overnight. In essence, the FDIC is going to pay them to
clean up these banks. It'sa low-risk proposition for shareholders," said Peyton Green,
banking analyst with Sterne, Agee & Leach.
Rose said that despite recent crises with residential and commercial loans that helped sink
Orion and Century Bank, Florida is likely to be a banking profit center after the
recession, provided a company has capital and patience.
"Florida is a deposit-rich state," Rose said. "Demographic forecasts see larger numbers of
people moving in. That could be a couple of years away, but it will be a good place to be if
you are well capitalized and have good people in place."
The Florida deals, which did not require Iberiabank to raise additional capital, followed the
Aug. 21 assumption of all the deposits and some of the assets of Birmingham, Ala.-based
CapitalSouth Bank, which was closed by regulators. That brought 10 additional offices into
the Iberiabank fold.
Established in 1887 as the Iberia Building Association, the company went public as ISB
Financial Corp. in 1995 before becoming Iberiabank Corp. in 2000. Iberiabank broke out of
its Louisiana roots in 2006 with the acquisition of two Arkansas banking companies — Little
Rock-based Pulaski Investment Corp. and Jonesboro-based Pocahontas Bancorp Inc.
Iberiabank now has 135 banking offices in Louisiana, Arkansas, Tennessee, Alabama,
Texas and Florida, in addition to 26 title offices in Louisiana and Arkansas and mortgage
representatives in 11 states.
In March, Iberiabank drew attention when it became the first bank to give back federal
money from a program designed to stimulate lending during the credit crisis, saying the
funding came with too many federal strings attached. The company took a $2.2 million
charge to redeem preferred stock that had been issued to the U.S. Treasury in exchange for
the $90 million.
Since then, 24 other U.S. banking companies have returned the money.
With $273.5 million from two stock offerings over the last year, Iberiabank is watchful for
other acquisitions, though company officials have refused to speculate on specifics since the
FDIC doles out assumptions on a bid basis.
Green said he expected more action to come from Iberiabank after settling into Florida.
"I think Iberiabank will continue," Green said. "It will be a temporary resting point until they
get the people in place. But I think they will continue to be an active player."
In Sarasota, this bank is suddenly a player in Florida
By John Hielscher
Published: Wednesday, November 18, 2009 at 1:00 a.m.
Last Modified: Tuesday, November 17, 2009 at 6:32 p.m.
In one swift move, IberiaBank has become the fifth-largest bank in Sarasota and Manatee counties.
Click to enlarge
• Ousted Orion Bank CEO drawing scrutiny
• Federal regulators close Century, Orion banks
• Search ratings: How safe is your bank?
By taking over the failed Century Bank of Sarasota and Orion Bank of Naples last Friday, IberiaBank
grabbed $928 million in deposits and a 5.1 percent share in the Bradenton-Sarasota-Venice market.
Not bad for a bank from Lafayette, La., that was not even here before.
Statewide, IberiaBank vaulted from 215th place, with $132.5 million in deposits, to No. 20, with
nearly $3 billion.The timing was perfect to expand in Florida, says chief executive officer Daryl G.
Byrd."When everyone wanted to be in Florida and pay five times book for overvalued assets, we
expanded in Louisiana and Arkansas," Byrd said this week. "We believe this is the right time, price
and risk structure to enter these Florida markets.
"We like the changing competitive landscape in Florida. As you know, we like competing with large,
clumsy, line-of-business banks. We also believe there will be significant consolidation in Florida
through this cycle," he said.
IberiaBank acquired 34 offices, $3.1 billion in assets and $2.5 billion in loans from Century and
Orion. Loss-share agreements with the Federal Deposit Insurance Corp. cover $2.6 billion in assets.
Before the deals, IberiaBank's Florida presence was three offices in the Jacksonville area bought in
August from the failed CapitalSouth Bank of Birmingham, Ala.
Now, Florida will account for 36 percent of its loans and 35 percent of its deposit base, said John
Davis, senior executive vice president.
The bank, a consumer and commercial lender, is excited about growth opportunities in this part of
Florida, Byrd said, but it expects to take a "thoughtful" approach to lending.
Both Century and Orion were crippled by huge levels of bad loans.
"We are fortunate to be in a position to be patient from a lending perspective, given our strong
pipeline across our entire system," he said.
The Sarasota and Naples markets, among the most affluent in Florida, were especially attractive for
the wealth-management and private-banking business that IberiaBank wants to grow.
The bankers did not comment on whether they will close any of Century's 11 or Orion's 23 offices.
Century employs 133, Orion 260.
Before last week's deal, IberiaBank was a $6.5-billion-asset bank with 101 offices in six states. It also
operates title insurance offices and 43 mortgage offices in 11 states.
Analyst Michael Rose of Raymond James Equity Research kept his "strong buy" recommendation on
shares of parent IberiaBank Corp. following the acquisitions.
The company earned $24.3 million, or $1.22 per share, in the third quarter, up from $8.5 million, or 66
cents per share, a year earlier. Analyst BauerFinancial Inc. rated it a four-star "excellent" bank in the
IberiaBank's shares, which trade under the symbol "IBKC" on the Nasdaq, were selling for $56.64 at
the close of trading on Tuesday, up $2.21, or 4.2 percent. The shares jumped 18 percent on Monday,
the first day investors could act on news of the company's acquisitions of Century and Orion.
FDIC Board Adopts Proposed Interim Final Rule To Provide A Transitional
Safe Harbor For All Participations And Securitizations
FOR IMMEDIATE RELEASE Media Contact:
November 13, 2009 Andrew Gray at (202) 898-7192
On November 12, 2009, the Board of Directors of the Federal Deposit Insurance Corporation
(FDIC) adopted a proposed Interim Final Rule amending 12 C.F.R. § 360.6 to provide a
transitional safe harbor effective immediately for all participations and securitizations in
compliance with that rule as originally adopted in 2000. In summary, the Interim Final Rule
confirms that participations and securitizations completed or currently in process on or before
March 31, 2010 in reliance on the FDIC's existing regulation will be 'grandfathered' and continue
to be protected by the safe harbor provisions of Section 360.6 despite changes to generally
accepted accounting principles adopted by the Financial Accounting Standards Board.
"The Board's action provides needed clarity to the financial markets," said FDIC Chairman Sheila
C. Bair. "With changing accounting rules, we need both to ensure that participations and
securitizations that have relied on our existing regulation retain that protection and to consider
needed reforms for securitization going forward."
At the meeting, Chairman Bair also announced that FDIC staff would propose to the Board at its
December meeting a set of conditions that securitizations initiated after March 31st must meet to
receive 'safe harbor' treatment. "We have seen the problems that the 'originate to distribute'
model played in the build-up to the financial crisis," Chairman Bair concluded, "and we must
ensure that future securitizations do not place the Deposit Insurance Fund and our financial
system in jeopardy."
The safe harbor protection provided by the Interim Final Rule continues for the life of the
participation or securitization if the financial assets were transferred into the transaction or, for
revolving securitization trusts, beneficial interests were issued on or before March 31, 2010 and
the participation or securitization complied with Section 360.6. Under this transitional safe harbor,
the participation or securitization will comply with the Section 360.6 requirement that any transfers
into the transaction meet all conditions for sale accounting treatment under generally accepted
accounting principles, other than the 'legal isolation' condition, if the transfers satisfied generally
accepted accounting principles in effect for reporting periods prior to November 15, 2009.
For participations and securitizations that meet those requirements, the Interim Final Rule
provides that the FDIC shall not, by exercise of its authority to disaffirm or repudiate
contracts, seek to reclaim, recover, or recharacterize as property of the institution or the
receivership any financial assets transferred in connection with the securitization or
participation, even if the transaction does not satisfy all conditions for sale accounting
treatment under generally accepted accounting principles as effective for reporting
periods after November 15, 2009. As a result, any financial assets transferred into such
securitizations or participations will not be treated as property of the institution or
receivership, and consequently the consent requirement of 12 USC §1821(e)(13)(C) will
Robust M&A activity lies ahead, but FDIC deals are
Bank & Thrift - Industry News
November 13, 2009 1:24 PM ET
By Nathan Stovall
Bankers at the Sandler O'Neill & Partners East Coast Financial Services Conference said Nov. 12
that the industry is gearing up for robust M&A activity, but forecast that near-term opportunities
will likely be limited to government-assisted transactions given the difficulty in gauging another
bank's asset quality.
Broadcasting plans to hunt for FDIC-assisted deals has been a common refrain heard from
bankers in the past few months. It seems that many bankers feel the need to offer investors
an offensive story, even if they do not see that many bank failures arising either in their footprint
or nearby. Some bankers, including a few at the Sandler conference, do have their finger on the
deal trigger and are ready to move quickly when an opportunity arises in their market.
There should be plenty of chances to pull the trigger and execute FDIC-assisted transactions,
according to bankers at the Sandler event. State Bancorp Inc. President and CEO Thomas O'Brien
predicted that close to 500 banks will fail this cycle and thinks a substantial number of other
capital-starved institutions will seek merger partners as well. The shakeout would decrease the
number of banks in the U.S. to roughly 5,000, from the current level of 8,000-plus.
At least in the short run though, most bankers at the Sandler event did not see themselves buying
live banks due to concerns over the health of sellers' balance sheets. Valley National
Bancorp Chairman and CEO Gerald Lipkin said he would much prefer buying failed banks from
the FDIC — transactions that usually come with limited asset risk given the presence of a loss-
sharing agreement on the failed institution's loan portfolio.
"A non-FDIC [deal] will be very difficult, not impossible, but very difficult to do in today's
economy," Lipkin said.
Seacoast Banking Corp. of Florida Chairman and CEO Dennis Hudson III was even less
optimistic about the prospect of live bank deals. With asset values declining significantly, Hudson
said accounting rules make it nearly impossible to get a clean M&A deal done.
United Community Banks Inc. President and CEO Jimmy Tallent seemed to agree, arguing that
bank mergers will be restricted to government-assisted deals. He said bank failures will create
opportunities for some banks, but noted that there will be closures where there are no buyers,
particularly in Georgia, where a number of failures have already occurred.
Other bank executives at the conference took a different stance and said bidders for failed
institutions would actually increase going forward as the pace of failures ramps up. Even if that
happened, it seems unlikely that it would change the stance of some banks at the Sandler
conference, which seem to be taking a deliberate approach to government-assisted deals.
Capital City Bank Group Inc. falls in the category of potential acquirers that will remain patient
regardless of the number of bidders or availability of government-assisted opportunities in the
market. Capital City Chairman and CEO William Smith Jr. said the company has $80 million in
excess capital and is looking for FDIC-assisted opportunities in towns outside of Jacksonville and
Tampa, Fla.; Birmingham and Mobile, Ala.; and Atlanta.
"There are more opportunities and assisted transactions than we have money (for) today," Smith
said. He noted that the company is conducting due diligence on a number of banks; however,
Smith said he plans to wait for those institutions to fail before making an offer.
Smith said the company went through one bidding process with the FDIC and despite losing,
found the process helpful. He further said the company does not review FDIC deals from only a
financial standpoint, noting that targets must also represent a strategic fit. For example, he said
Capital City would not disrupt its attractive deposit makeup by acquiring a failed institution
whose cost of funds was five times as high as its own.
Other bankers at the Sandler event noted that they might not be able to participate in FDIC-
assisted transactions simply due to the lack of many bank failures in their respective
footprints. Hudson City Bancorp Inc. Chairman and CEO Ronald Hermance Jr. said he gets to
look at every FDIC deal that comes down the pike and believes many of those transactions "look
terrific" from a financial standpoint. However, he noted that no bank failures of significant size
have occurred within his company's footprint.
Even if FDIC-assisted deals do not surface in their markets, a few executives said they were
willing to look at live banks. Danvers Bancorp Inc. Chairman, President and CEO Kevin
Bottomley said he certainly is not averse to doing more acquisitions. And a NewAlliance
Bancshares Inc. executive said at the event that the company would look at transactions along the
Amtrak corridor from Boston to New York and even as far south as Maryland.
FirstMerit Corp., which just inked a transaction to buy 24 branches in the Chicago area, is still on
the prowl for deals. CEO PaulGreig said the company has the capacity in its systems to handle
another $8 billion in assets and noted that the company has prepared for acquisitions for over a
It seems that FirstMerit is not alone in its preparations, as most of the aforementioned institutions
have also been getting ready for deals for some time. The intentions of the bankers at the Sandler
event seem clear; the question is when will they act?
Speeches & Testimony
Remarks by FDIC Chairman Sheila Bair at the Institute of International Bankers
Conference; New York, NY
November 10, 2009
Today I want to talk about how we can strengthen our banking system by
restoring market discipline.
Looking back over just the past 12 to 18 months, it's abundantly clear that the
market failed to prevent the excessive risk-taking that drove our financial system
to the brink of collapse. Of course, the government also failed to prevent the
So the critical question is do we now have the willpower -- both in government
and in the industry -- to address a root cause of the crisis by eliminating the belief
that the government will always support large, interconnected financial firms? Or
will we maintain the status quo and risk a repeat of this episode sometime down
Key resolution features
To end too big to fail, we need an effective mechanism to close large, financial
intermediaries when they get into trouble. A good model is the FDIC process for
banks. To prevent bank runs from spreading and affecting the broader financial
system, insured deposits must be made immediately available to the customers
of failed institutions. To achieve this, the insurer itself must have ready access to
funding. In the case of the FDIC, this is accomplished by maintaining a Deposit
Insurance Fund and by the existence of government lines of credit as an
emergency backstop for potential liquidity needs.
A second feature of our resolution scheme is the ability to recycle valuable
banking relationships and assets from the failed bank back into the private sector
via acquisition. This allows the FDIC to reduce losses to the Deposit Insurance
Fund while ensuring that these valuable relationships and assets can continue to
finance economic activity that creates new jobs. Banking relationships with
businesses and consumers are costly to establish and valuable to maintain.
Whenever possible, they should be preserved in the resolution process.
A third feature of our resolution scheme is that we can provide continuity for the
capital markets, trust and transactions services that were being provided by
failing institution to its customers. Similar to traditional bank lending relationships,
these services also cannot be immediately replaced without substantial cost or a
significant disruption to real economic activity. An efficient resolution process
ensures continuity for such transactions. In the case of larger institutions, this
continuity is sometimes preserved by the temporary creation of a bridge bank.
The FDIC is the only Federal government agency with the responsibility for
resolving failing banks and thrifts. The FDIC seamlessly resolves failing
institutions using a receivership system separate from the court-administered
bankruptcy process. Since 1934, the FDIC has been involved in more than 3,000
insured depository institution failures and assistance transactions. This year
alone, the FDIC has resolved 120 institutions that held total deposits of $112
billion, almost all of which will turn out to be fully insured.
Resolution vs. bankruptcy
While the FDIC has, for the most part, the legal authorities and resources to
efficiently resolve insured depository institutions that have failed, a large share of
financial intermediation now takes place outside of traditional insured
depositories. When these institutions become critically undercapitalized, there is
no recourse other than the commercial bankruptcy process. While bankruptcy
works well to resolve the vast majority of business failures, it is not well-suited for
resolving large interconnected financial firms.
As we saw with the financial crisis, large financial firms are subject to the same
types of liquidity runs as banks. And when they run into trouble, it's essential to
have the ability to act quickly and decisively to maintain critical operations, retain
franchise value, and protect the public interest.
By contrast, the commercial bankruptcy process begins by freezing creditor
claims and giving management a right to reorganize. This process does not
provide the type of continuity and certainty embodied in the rules that govern the
FDIC's receivership authority. Forcing large, non-bank financial institutions
through the bankruptcy process can create significant risks for the real economy
by disrupting key financial relationships and transactions.
In bankruptcy, there is no readily available funding to ensure the continuity of
operations. Absent bankruptcy financing, the courts will typically force liquidation
even if that raises the costs to claimants and disrupts essential services. In
bankruptcy, there is no option for a bridge bank that can provide continuity of
operations until the failed institution is sold. The lack of an acceptable alternative
to bankruptcy tied the hands of policy makers in the recent crisis.
It was clear that these non-depository financial institutions were too important to
the global financial system to subject them to the costs and economic
uncertainties of the bankruptcy process. But absent an alternative process for
intervention and resolution, policy makers were forced to extend the public safety
net at taxpayer expense to support a number of financial institutions. In doing so,
governments made explicit the fact that some institutions are simply too big to
Addressing too big to fail
This crisis has given us an opportunity to achieve significant regulatory reform. It
is imperative that we meet this challenge head-on and not sidestep our
responsibilities to ensure financial stability and to protect the taxpayers. We must
create a more resilient, transparent, and better regulated financial system – one
that combines stronger and more effective regulation with market discipline.
Our first task is to end too big to fail. Only by doing so can we ensure a
competitive balance between large and small institutions and limit the built-in
incentives for large, complex financial firms to take on greater risk, greater
leverage and greater size. There are four elements to this task.
First, we must have an effective and credible resolution mechanism that provides
for the orderly wind-down of systemically important financial firms, while avoiding
financial disruptions that could devastate our financial markets and the global
economy. I believe that the best option is to create a resolution mechanism that
makes it possible to break-up and sell the failed firm. It should be designed to
protect the public interest, prevent the use of taxpayer funds, and provide
continuity for the failed institution's critical functions.
The FDIC's present receivership authority is a good model. We have the
authority if necessary to temporarily move key functions of the failed institution to
a newly chartered bridge bank. We also have the obligation to impose losses on
those who should bear them in the event of a failure. Shareholders of the failed
bank typically lose all of their investment, and unsecured creditors generally lose
some or all of the amounts owed to them. Top management is replaced, as are
other employees who contributed to the institution's failure. And the assets of the
failed institution are eventually sold to a stronger, better managed institution.
This type of resolution mechanism should be applied to all systemically important
financial institutions – whether banks or non-banks. We should require that these
firms prepare detailed plans for their dissolution (so-called "living wills"). This
would assist the receiver, and allow financial markets to continue to function
smoothly while the firm's operations are transferred or unwound in an orderly
manner. This process could address the potential for systemic risk without a
bailout and without the near panic we saw a year ago.
Importantly, over the long run, it would provide the market discipline that is so
clearly lacking from the present arrangement. A new resolution scheme for
systemically important non-banks would need access to liquidity in order to effect
a resolution, provide continuity of services and complete transactions that are in
process at the time of failure. This would facilitate an orderly wind down. And
costs associated with the resolution would be borne by shareholders and
In my view, it is vital that the funding for working capital should come from the
industry. A reserve fund should be established, maintained and funded in
advance of any failure by imposing risk-based assessments on the industry. This
would not be a bail-out fund. This would not be an insurance fund. It would
provide short term liquidity to maintain essential operations of the institution as it
is broken up and sold off. It would not be used to `recapitalize or prop-up failing
firms. Only this pre-funded approach can assure that taxpayers will not once
again be presented the bill for these failures.
Building a resolutions fund balance in advance would also help prevent the need
for imposing assessments during an economic crisis, and assure that any failed
firms will have paid something into the fund. Loss absorption by the shareholders
and creditors would provide clear rules and signals to the market that will be
crucial to restoring market discipline in our financial sector.
Second, a more resilient resolution process also requires greater international
cooperation, as our largest financial firms now span the globe. Under current
resolution protocols, systemically important institutions operate under national
laws that focus on domestic concerns. In a crisis, the domestic resolution laws of
most countries are simply inadequate to deal with the complexities posed by
cross-border financial firms. As a consequence, there is no functioning
international resolution process.
The FDIC has co-chaired a working group under the auspices of the Basel
Committee to evaluate current law and policy and make recommendations for the
future. The report recommends reform and greater harmonization of national
laws to achieve more effective tools to resolve cross-border institutions. It also
recommends specific steps to reduce the likelihood that a failure in one country
will create a crisis in another.
Moving toward a more 'universal' resolution approach will require us to address
some difficult issues – such as how to share the costs of a resolution and how to
provide an international forum to resolve disputes. Today, the lack of any
internationally agreed upon protocols means that ring-fencing or a territorial
approach is the likely outcome. Recognizing this reality, we must consider how
improvements in governance and operational autonomy within an international
holding company structure could enhance the ability to conduct resolutions and
avoid future bailouts.
Living wills are one key initiative supported by the Basel Committee working
group and the G-20 leaders. These plans would be developed in cooperation
with the resolution authority and reviewed and updated annually. Clearly, this
would be helpful to any future receiver. But I believe they also would be of
immense assistance to financial institutions themselves by highlighting
dependencies, risks, and ways to improve their own resiliency in a crisis.
Tougher bank capital standards needed
Third, stronger bank capital standards also are urgently needed. There's an
emerging consensus among policymakers around the world on this point. I'm
encouraged by some of the capital reform discussions under way in the Basel
Committee. Yet while international regulators certainly are "talking the talk", it is
far too early to declare victory.
Despite almost universal agreement the Basel I-based capital requirements were
too low, bank supervisors around the world are diligently implementing a rule
designed to lower those requirements still more. I refer to the advanced
approaches of Basel II. The advanced approaches were designed at a time when
confidence in the reliability of banks' internal models and risk estimates went
almost unchallenged. Banks outside the U.S. have been reporting lower capital
requirements from Basel II even during the depths of the current downturn, when
the risk estimates driving those requirements are surely as pessimistic as they
will ever be.
There is little doubt that there will be eye-popping reductions in required capital
when the good times return to banking. The obvious lesson of the crisis is that
we need to strengthen capital standards at our large banks, not weaken them.
From the FDIC's perspective, banks may not use the advanced approaches to
lower their capital. I expect our supervisors to require the general risk-based
capital requirements to serve as a floor under the advanced approaches, as a
condition of any bank's approval. For now, that means Basel I will serve as a
floor. Once we finalize the new rules for the standardized approach under Basel
II, I anticipate that will serve as a new higher floor.
To repeat: large banks today need more capital, not less.
Incentives to reduce size and complexity
The fourth and final major task in creating a new resolution process is
considering alternative measures that will curb the unbridled growth and
complexity of large, systemically important firms.
One way to achieve this is to significantly raise the cost of being too big or
interconnected. Institutions deemed to pose a systemic risk by virtue of their size
or activities should be subject to higher capital and liquidity requirements – as
well as higher deposit insurance premiums – commensurate with the risks they
pose to the system and the competitive benefits they derive from their unique
In addition, large financial holding companies should be subject to tougher
prompt corrective action standards under U.S. law. And they should be subject to
holding company capital requirements that are no less stringent than those for
insured banks. Off-balance-sheet assets and conduits, which turned out to be
not-so-remote from their parent organizations in the recent crisis, should be
counted and capitalized as on-balance-sheet risks.
As you know, Congress is tackling these very serious issues. The FDIC is
working closely with Chairman Barney Frank in developing a responsible
approach that will end bail-outs, promote competition and restore market
discipline for our largest institutions. I'm very pleased with the progress to date in
the House Financial Services Committee toward ending too big to fail.
It is my understanding Chairman Frank's proposed legislation will be
strengthened. Including certain areas: the elimination of assistance to specific
open firms so that firms that fail are closed; a ban on capital investments so that
in the future government will not take an ownership interest in financial
institutions; a resolution process that makes shareholders and creditors, not
taxpayers, bear the losses; a pre-funded systemic resolution fund paid by the
largest financial firms, to provide working capital for orderly resolutions; and a
higher standard for both the FDIC and the Federal Reserve to provide support to
healthy institutions in the event of a systemic meltdown of the type that we saw
Chairman Frank will conclude his committee work next week. And I believe the
House will consider this tough legislative proposal in December.
We've had too many years of unfettered risk-taking, and too many years of
government subsidized risk. It's time we changed the rules of the game. It's time
we closed the book on the doctrine of too big to fail. Only by instituting a credible
resolution process and removing the existing incentives for size and complexity
can we limit systemic risk, and the long-term competitive advantages and public
subsidy it confers on the largest institutions.
September 24, 2009
Small Banks Dip Toes into IPO Waters
By Marissa Fajt
A small Florida bank raised $70 million through an initial public offering Wednesday, in
what is believed to be the first such deal in the banking sector in two years.
With another one on the way from a Texas bank, some industry observers said more privately
held companies could be encouraged to test the thawing capital markets now.
Though none predict an IPO onslaught, they called the warm reception for 1st United
Bancorp in Boca Raton notable, given that Florida is among the states hardest hit by the real
estate meltdown. The $633 million-asset bank even had enough investor interest to upsize
the offering; it initially sought $50 million.
Rudy Schupp, its president and chief executive officer, said 1st United wanted the capital
immediately to buy struggling or failed banks in its home state. But he acknowledged that
general market conditions for IPOs are less than ideal.
"It was probably a brave thing to do, and it is probably timing that many would not choose,"
Schupp said. "But from our perspective, the opportunity for growth is now."
1st United started the process of going public earlier this year, and several lawyers and
investment bankers said more banks are likely to do so now that the flow of capital into the
industry is picking up.
One IPO is already in the works from the $4.4 billion-asset PlainsCapital Corp. in Dallas. It
filed with the Securities and Exchange Commission in August to raise up to $140 million.
PlainsCapital executives would not discuss the offering.
Before 1st United, the most recent IPO in the banking industry had been from Encore
Bancshares Inc. in Houston in July 2007, according to information provided by Stifel,
Nicolaus & Co. Encore raised $41.6 million.
But the capital crunch is not isolated to banks. Over the past two years the IPO market has
slowed down across all industries. According to data from IPOfinancial.com, 23 IPOs have
priced so far this year, versus 43 in the same period last year and 144 in 2007.
David Menlow, the president of IPOfinancial.com, said it appears the market is beginning to
rebound. There were nine deals scheduled to price this week.
"This week is the kickoff to what we expect to be a fairly respectable fourth quarter," Menlow
Some said other banks are likely to come to market.
"We think there will be more to come," said Will Luedke, a partner in the Houston office of
the law firm Bracewell & Giuliani LLP. "It is abundantly clear now, either through a couple
IPOs or a number of private placements, there is capital for banks. We are convinced that
capital is available." But others contend that 1st United was an exception to the IPO freeze.
"I think they were in a unique position," said Jack Greeley, an attorney with Smith
MacKinnon Pak in Orlando. "I don't think in today's environment you will start to see a
Most agreed that the ones who succeed in finding investors will likely have a similar profile to
1st United: a clean balance sheet, a good standing with regulators and the chance to use the
capital for acquisitions.
"It is a very selective market," said Ben Plotkin, the vice chairman of Stifel, Nicolaus. "You
have to have a company that is clean and has an experienced management team and has
shown an ability to do deals and leverage the capital. It is a positive sign for the market, but
not a green light for all." (Stifel was the lead manager and sole book runner for the 1st
Some industry observers said 1st United's stock sale does not fit the standard definition on an
IPO because its shares had been on the pink sheets. However, others familiar with the IPO
market disagreed with that assessment, arguing that the company has never done a public
offering previously and had virtually no stock trades.
Schupp said the company had to register after it bought the $180 million-asset Equitable
Bank in Fort Lauderdale last year for $55.6 million in cash and stock. That pushed the
number of shareholders above the threshold for a private company.
In the offering Wednesday, 1st United sold its shares at $5 each, a slight discount to tangible
On Wednesday the shares closed at $6.10. Schupp said the management of 1st United has
experience with acquisitions and plans to use it.
The company's three top executives have overseen 31 bank deals in their careers. They also
have completed two acquisitions since joining 1st United in 2003, when it had $68 million of
Besides Equitable, the company also acquired most of Citrus Bank from CIB Marine
Bancshares Inc. in Pewaukee, Wis. 1st United took the Citrus branches, $188 million in
deposits and about $40 million in loans in the deal.
Now the company intends to look for acquisitions in markets where the leadership team -
which includes Warren S. Orlando, the chairman, and John Marino, the chief operating
officer and chief financial officer - have operated banks before. Before joining 1st United,
Orlando co-founded and was CEO and president of the former 1st United Bancorp in Boca
Raton, which sold itself to Wachovia Corp. in 2002. That company had grown to $1.2 billion
in assets through 11 acquisitions before being sold. Marino was the chief financial officer
"In our past, we stretched from the Keys to Orlando and over to Tampa - central and south
Florida," Schupp said. "All those markets are appealing to us. Ideally, in this business, it
makes sense to stay close to your legacy markets.
Speeches & Testimony
Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on
Examining the State of the Banking Industry before the Subcommittee on Financial
Institutions, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Room 538,
Dirksen Senate Office Building
October 14, 2009
Chairman Johnson, Ranking Member Crapo and members of the Subcommittee, I appreciate the
opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) regarding the
condition of FDIC-insured institutions and the deposit insurance fund (DIF). While challenges
remain, evidence is building that financial markets are stabilizing and the American economy is
starting to grow again. As promising as these developments are, the fact is that bank
performance typically lags behind economic recovery and this cycle is no exception. Regardless
of whatever challenges still lie ahead, the FDIC will continue protecting insured depositors as we
have for over 75 years.
The FDIC released its comprehensive summary of second quarter 2009 financial results for all
FDIC-insured institutions on August 27. The FDIC's Quarterly Banking Profile provided evidence
that the difficult and necessary process of recognizing loan losses and cleaning up balance
sheets continues to be reflected in the industry's bottom line. As a result, the number of problem
institutions increased significantly during the quarter. We expect the numbers of problem
institutions to increase and bank failures to remain high for the next several quarters.
My testimony today will review the financial performance of FDIC-insured institutions and
highlight some of the most significant risks that the industry faces. In addition, I will discuss the
steps that we are taking through supervisory and resolutions processes to address risks and to
reduce costs from failures. Finally, I will summarize the condition of the DIF and the recent steps
that we have taken to strengthen the FDIC's cash position.
In the wake of the financial crisis of last Fall and the longest and deepest recession since the
1930s, the U.S. economy appears to be growing once again. Through August, the index of
leading economic indicators had risen for five consecutive months. Consensus forecasts call for
the economy to grow at a rate of 2.4 percent or higher in both the third and fourth quarters. While
this relative improvement in economic conditions appears to represent a turning point in the
business cycle, the road to full recovery will be a long one that poses additional challenges for
While we are encouraged by recent indications of the beginnings of an economic recovery,
growth may still lag behind historical norms. There are several reasons why the recovery may be
less robust than was the case in the past. Most important are the dislocations that have occurred
in the balance sheets of the household sector and the financial sector, which will take time to
Households have experienced a net loss of over $12 trillion in net worth during the past 7
quarters, which amounts to almost 19 percent of their net worth at the beginning of the period.
Not only is the size of this wealth loss unprecedented in our modern history, but it also has been
spread widely among households to the extent that it involves declines in home values. By some
measures, the average price of a U.S. home has declined by more than 30 percent since mid-
2006. Home price declines have left an estimated 16 million mortgage borrowers "underwater"
and have contributed to an historic rise in the number of foreclosures, which reached almost 1.5
million in just the first half of 2009.1
Household financial distress has been exacerbated by high unemployment. Employers have cut
some 7.2 million jobs since the start of the recession, leaving over 15 million people unemployed
and pushing even more people out of the official labor force. The unemployment rate now stands
at a 26-year high of 9.8 percent, and may go higher, even in an expanding economy, while
discouraged workers re-enter the labor force.
In response to these disruptions to wealth and income, U.S. households have begun to save
more out of current income. The personal savings rate, which had dipped to as low as 1.2 percent
in the third quarter of 2005, rose to 4.9 percent as of second quarter 2009 and could go even
higher over the next few years as households continue to repair their balance sheets. Other
things being equal, this trend is likely to restrain growth in consumer spending, which currently
makes up more than 70 percent of net GDP.
Financial sector balance sheets also have undergone historic distress in the recent financial crisis
and recession. Most notably, we have seen extraordinary government interventions necessary to
stabilize several large financial institutions, and now as the credit crisis takes its toll on the real
economy, a marked increase in the failure rate of smaller FDIC-insured institutions. Following a
five-year period during which only ten FDIC-insured institutions failed, there were 25 failures in
2008 and another 98 failures so far in 2009.
In all, FDIC-insured institutions have set aside just over $338 billion in provisions for loan losses
during the past six quarters, an amount that is about four times larger than their provisions during
the prior six quarter period. While banks and thrifts are now well along in the process of loss
recognition and balance sheet repair, the process will continue well into next year, especially for
commercial real estate (CRE).
Recent evidence points toward a gradual normalization of credit market conditions amid still-
elevated levels of problem loans. We meet today just one year after the historic liquidity crisis in
global financial markets that prompted an unprecedented response on the part of governments
around the world. In part as a result of the Treasury's Troubled Asset Relief Program (TARP), the
Federal Reserve's extensive lending programs, and the FDIC's Temporary Liquidity Guarantee
Program (TLGP), financial market interest rate spreads have retreated from highs established at
the height of the crisis last Fall and activity in interbank lending and corporate bond markets has
However, while these programs have played an important role in mitigating the liquidity crisis that
emerged at that time, it is important that they be rolled back in a timely manner once financial
market activity returns to normal. The FDIC Board recently proposed a plan to phase out the debt
guarantee component of the Temporary Liquidity Guarantee Program (TLGP) on October 31st.
This will represent an important step towards putting our financial markets and institutions back
on a self-sustaining basis. And even while we seek to end the various programs that were
effective in addressing the liquidity crisis, we also recognize that we may need to redirect our
efforts to help meet the credit needs of household and small business borrowers.
For now, securitization markets for government-guaranteed debt are functioning normally, but
private securitization markets remain largely shut down. During the first seven months of 2009,
$1.2 trillion in agency mortgage-backed securities were issued in comparison to just $9 billion in
private mortgage-backed securities. Issuance of other types of private asset-backed securities
(ABS) also remains weak. ABS issuance totaled only $118 billion during the first 9 months of
2009 in comparison to $136 billion during the first 9 months of 2008 and peak annual issuance of
$754 billion in 2006.
Significant credit distress persists in the wake of the recession, and has now spread well beyond
nonprime mortgages. U.S. mortgage delinquency and foreclosure rates also reached new historic
highs in second quarter of 2009 when almost 8 percent of all mortgages were seriously
delinquent. In addition, during the same period, foreclosure actions were started on over 1
percent of loans outstanding.2 Consumer loan defaults continue to rise, both in number and as a
percent of outstanding loans, although the number of new delinquencies now appears to be
tapering off. Commercial loan portfolios are also experiencing elevated levels of problem loans
which industry analysts suggest will peak in late 2009 or early 2010.
Recent Financial Performance of FDIC-Insured Institutions
The high level of distressed assets is reflected in the weak financial performance of FDIC-insured
institutions. FDIC-insured institutions reported an aggregate net loss of $3.7 billion in second
quarter 2009. The loss was primarily due to increased expenses for bad loans, higher noninterest
expenses and a one-time loss related to revaluation of assets that were previously reported off
balance sheet. Commercial banks and savings institutions added $67 billion to their reserves
against loan losses during the quarter. As the industry has taken loss provisions at a rapid pace,
the industry's allowance for loan and lease losses has risen to 2.77 percent of total loans and
leases, the highest level for this ratio since at least 1984. However, noncurrent loans have been
growing at a faster rate than loan loss reserves, and the industry's coverage ratio (the allowance
for loan and lease losses divided by total noncurrent loans) has fallen to its lowest level since the
third quarter of 1991.3
Insured institutions saw some improvement in net interest margins in the quarter. Funding costs
fell more rapidly than asset yields in the current low interest rate environment, and margins
improved in the quarter for all size groups. Nevertheless, second quarter interest income was 2.3
percent lower than in the first quarter and 15.9 percent lower than a year ago, as the volume of
earning assets fell for the second consecutive quarter. Industry noninterest income fell by 1.8
percent compared to the first quarter.
Credit quality worsened in the second quarter by almost all measures. The share of loans and
leases that were noncurrent rose to 4.35 percent, the highest it has been since the data were first
reported. Increases in noncurrent loans were led by 1-to-4 family residential mortgages, real
estate construction and development loans, and loans secured by nonfarm nonresidential real
estate loans. However, the rate of increase in noncurrent loans may be slowing, as the second-
quarter increase in noncurrent loans was about one-third smaller than the volume of noncurrent
loans added in first quarter. The amount of loans past-due 30-89 days was also smaller at the
end of the second quarter than in the first quarter. Net charge-off rates rose to record highs in the
second quarter, as FDIC-insured institutions continued to recognize losses in the loan portfolios.
Other real estate owned (ORE) increased 79.7 percent from a year ago.
Many insured institutions have responded to stresses in the economy by raising and conserving
capital, some as a result of regulatory reviews. Equity capital increased by $32.5 billion (2.4
percent) in the quarter. Treasury invested a total of $4.4 billion in 117 independent banks and
bank and thrift holding companies during the second quarter, and nearly all of these were
community banks. This compares to a total of more than $200 billion invested since the program
began. Average regulatory capital ratios increased in the quarter as well. The leverage capital
ratio increased to 8.25 percent, while the average total risk-based capital ratio rose to 13.76
percent. However, while the average ratios increased, fewer than half of all institutions reported
increases in their regulatory capital ratios.
The nation's nearly 7,500 community banks -- those with less than $1 billion in total assets -- hold
approximately 11 percent of total industry assets. They posted an average return on assets of
negative 0.06 percent, which was slightly better than the industry as a whole. As larger banks
often have more diverse sources of noninterest income, community banks typically get a much
greater share of their operating income from net interest income. In general, community banks
have higher capital ratios than their larger competitors and are much more reliant on deposits as
a source of funding.
Average ratios of noncurrent loans and charge-offs are lower for community banks than the
industry averages. In part, this illustrates the differing loan mix between the two groups. The
larger banks' loan performance reflects record high loss rates on credit card loans and record
delinquencies on mortgage loans. Community banks are important sources of credit for the
nation's small businesses and small farmers. As of June 30, community banks held 38 percent of
the industry's small business and small farm loans.4 However, the greatest exposures faced by
community banks may relate to construction loans and other CRE loans. These loans made up
over 43 percent of community bank portfolios, and the average ratio of CRE loans to total capital
was above 280 percent.
As insured institutions work through their troubled assets, the list of "problem institutions" -- those
rated CAMELS 4 or 5 -- will grow. Over a hundred institutions were added to the FDIC's "problem
list" in the second quarter. The combined assets of the 416 banks and thrifts on the problem list
now total almost $300 billion. However, the number of problem institutions is still well below the
more than 1,400 identified in 1991, during the last banking crisis on both a nominal and a
percentage basis. Institutions on the problem list are monitored closely, and most do not fail. Still,
the rising number of problem institutions and the high number of failures reflect the challenges
that FDIC-insured institutions continue to face.
Risks to FDIC-Insured Institutions
Troubled loans at FDIC-insured institutions have been concentrated thus far in three main areas -
- residential mortgage loans, construction loans, and credit cards. The credit quality problems in
1-to-4 family mortgage loans and the coincident declines in U.S. home prices are well known to
this Committee. Net chargeoffs of 1- to 4-famly mortgages and home equity lines of credit by
FDIC-insured institutions over the past two years have totaled more than $65 billion. Declining
home prices have also impacted construction loan portfolios, on which many small and mid-sized
banks heavily depend. There has been a ten-fold increase in the ratio of noncurrent construction
loans since mid-year 2007, and this ratio now stands at a near-record 13.5 percent. Net charge-
offs for construction loans over the past two years have totaled about $32 billion, and almost 40
percent of these were for one-to-four family construction.
With the longest and deepest recession since the 1930s has come a new round of credit
problems in consumer and commercial loans. The net charge-off rate for credit card loans on
bank portfolios rose to record-high 9.95 percent in the second quarter. While stronger
underwriting standards and deleveraging by households should eventually help bring loss rates
down, ongoing labor market distress threatens to keep loss rates elevated for an extended
period. By contrast, loans to businesses, i.e., commercial and industrial (C&I) loans, have
performed reasonably well given the severity of the recession in part because corporate balance
sheets were comparatively strong coming into the recession. The noncurrent loan ratio of 2.79
percent for C&I loans stands more than four times higher than the record low seen in 2007, but
remains still well below the record high of 5.14 percent in 1987.
The most prominent area of risk for rising credit losses at FDIC-insured institutions during the
next several quarters is in CRE lending. While financing vehicles such as commercial mortgage-
backed securities (CMBS) have emerged as significant CRE funding sources in recent years,
FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding,
and their exposure to CRE loans stands at an historic high. As of June, CRE loans backed by
nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2 percent of total loans and
The deep recession, in combination with ongoing credit market disruptions for market-based CRE
financing, has made this a particularly challenging environment for commercial real estate. The
loss of more than 7 million jobs since the onset of the recession has reduced demand for office
space and other CRE property types, leading to deterioration in fundamental factors such as
rental rates and vacancy rates. Amid weak fundamentals, investors have been re-evaluating their
required rate of return on commercial properties, leading to a sharp rise in "cap rates" and lower
market valuations for commercial properties. Finally, the virtual shutdown of CMBS issuance in
the wake of last year's financial crisis has made financing harder to obtain. Large volumes of
CRE loans are scheduled to roll over in coming quarters, and falling property prices will make it
more difficult for some borrowers to renew their financing.
Outside of construction portfolios, losses on loans backed by CRE properties have been modest
to this point. Net charge-offs on loans backed by nonfarm, nonresidential properties have been
just $6.2 billion over the past two years. Over this period, however, the noncurrent loan ratio in
this category has quadrupled, and we expect it to rise further as more CRE loans come due over
the next few years. The ultimate scale of losses in the CRE loan portfolio will very much depend
on the pace of recovery in the U.S. economy and financial markets during that time.
FDIC Response to Industry Risks and Challenges
Supervisory Response to Problems in Banking Industry
The FDIC has maintained a balanced supervisory approach that focuses on vigilant oversight but
remains sensitive to the economic and real estate market conditions. Deteriorating credit quality
has caused a reduction in earnings and capital at a number of institutions we supervise which has
resulted in a rise in problem banks and the increased issuance of corrective programs. We have
been strongly advocating increased capital and loan loss allowance levels to cushion the impact
of rising non-performing assets. Appropriate allowance levels are a fundamental tenet of sound
banking, and we expect that banks will add to their loss reserves as credit conditions warrant --
and in accordance with generally accepted accounting principles.
We have also been emphasizing the importance of a strong workout infrastructure in the current
environment. Given the rising level of non-performing assets, and difficulties in refinancing loans
coming due because of decreased collateral values and lack of a securitization market, banks
need to have the right resources in place to restructure weakened credit relationships and
dispose of other real estate holdings in a timely, orderly fashion.
We have been using a combination of off-site monitoring and on-site examination work to keep
abreast of emerging issues at FDIC-supervised institutions and are accelerating full-scope
examinations when necessary. Bankers understand that FDIC examiners will perform a thorough,
yet balanced asset review during our examinations, with a particular focus on concentrations of
credit risk. Over the past several years, we have emphasized the risks in real estate lending
through examination and industry guidance, training, and targeted analysis and supervisory
activities. Our efforts have focused on underwriting, loan administration, concentrations, portfolio
management and stress testing, proper accounting, and the use of interest reserves.
CRE loans and construction and development loans are a significant examination focus right now
and have been for some time. Our examiners in the field have been sampling banks' CRE loan
exposures during regular exams as well as special visitations and ensuring that credit grading
systems, loan policies, and risk management processes have kept pace with market conditions.
We have been scrutinizing for some time construction and development lending relationships that
are supported by interest reserves to ensure that they are prudently administrated and accurately
portray the borrower's repayment capacity. In 2008, we issued guidance and produced a journal
article on the use of interest reserves,5 as well as internal review procedures for examiners.
We strive to learn from those instances where the bank's failure led to a material loss to the DIF,
and we have made revisions to our examination procedures when warranted. This self-
assessment process is intended to make our procedures more forward-looking, timely and risk-
focused. In addition, due to increased demands on examination staff, we have been working
diligently to hire additional examiners since 2007. During 2009, we hired 440 mid career
employees with financial services skills as examiners and almost another 200 examiner trainees.
We are also conducting training to reinforce important skills that are relevant in today's rapidly
changing environment. The FDIC continues to have a well-trained and capable supervisory
workforce that provides vigilant oversight of state nonmember institutions.
Measures to Ensure Examination Programs Don't Interfere with Credit Availability
Large and small businesses are contending with extremely challenging economic conditions
which have been exacerbated by turmoil in the credit markets over the past 18 months. These
conditions, coupled with a more risk-averse posture by lenders, have diminished the availability of
We have heard concerns expressed by members of Congress and industry representatives that
banking regulators are somehow instructing banks to curtail lending, making it more difficult for
consumers and businesses to obtain credit or roll over otherwise performing loans. This is not the
case. The FDIC provides banks with considerable flexibility in dealing with customer relationships
and managing loan portfolios. I can assure you that we do not instruct banks to curtail prudently
managed lending activities, restrict lines of credit to strong borrowers, or require appraisals on
performing loans unless an advance of new funds is being contemplated.
It has also been suggested that regulators are expecting banks to shut off lines of credit or not
roll-over maturing loans because of depreciating collateral values. To be clear, the FDIC focuses
on borrowers' repayment sources, particularly their cash flow, as a means of paying off loans.
Collateral is a secondary source of repayment and should not be the primary determinant in
extending or refinancing loans. Accordingly, we have not encouraged banks to close down credit
lines or deny a refinance request solely because of weakened collateral value.
The FDIC has been vocal in its support of bank lending to small businesses in a variety of
industry forums and in the interagency statement on making loans to creditworthy borrowers that
was issued last November. I would like to emphasize that the FDIC wants banks to make prudent
small business loans as they are an engine of growth in our economy and can help to create jobs
at this critical juncture.
In addition, the federal banking agencies will soon issue guidance on CRE loan workouts. The
agencies recognize that lenders and borrowers face challenging credit conditions due to the
economic downturn, and are frequently dealing with diminished cash flows and depreciating
collateral values. Prudent loan workouts are often in the best interest of financial institutions and
borrowers, particularly during difficult economic circumstances and constrained credit availability.
This guidance reflects that reality, and supports prudent and pragmatic credit and business
decision-making within the framework of financial accuracy, transparency, and timely loss
Innovative resolution structures
The FDIC has made several changes to its resolution strategies in response to this crisis, and we
will continue to re-evaluate our methods going forward. The most important change is an
increased emphasis on partnership arrangements. The FDIC and RTC used partnership
arrangements in the past -- specifically loss sharing and structured transactions. In the early
1990s, the FDIC introduced and used loss sharing. During the same time period, the RTC
introduced and used structured transactions as a significant part of their asset sales strategy. As
in the past, the FDIC has begun using these types of structures in order to lower resolution costs
and simplify the FDIC's resolution workload. Also, the loss share agreements reduce the FDIC's
liquidity needs, further enhancing the FDIC's ability to meet the statutory least cost test
The loss share agreements enable banks to acquire an entire failed bank franchise without taking
on too much risk, while the structured transactions allow the FDIC to market and sell assets to
both banks and non-banks without undertaking the tasks and responsibilities of managing those
assets. Both types of agreements are partnerships where the private sector partner manages the
assets and the FDIC monitors the partner. An important characteristic of these agreements is the
alignment of interests: both parties benefit financially when the value of the assets is maximized.
For the most part, after the end of the savings and loan and banking crisis of the late 1980s and
early 1990s, the FDIC shifted away from these types of agreements to more traditional methods
since the affected asset markets became stronger and more liquid. The main reason why we now
are returning to these methods is that in the past several months investor interest has been low
and asset values have been uncertain. If we tried to sell the assets of failed banks into today's
markets, the prices would likely be well below their intrinsic value -- that is, their value if they were
held and actively managed until markets recover. The partnerships allow the FDIC to sell the
assets today but still benefit from future market improvements. During 2009, the FDIC has used
loss share for 58 out of 98 resolutions. We estimate that the cost savings have been substantial:
the estimated loss rate for loss share failures averaged 25 percent; for all other transactions, it
was 38 percent. Through September 30, 2009, the FDIC has entered into seven structured
transactions, with about $8 billion in assets.
To address the unique nature of today's crisis, we have made several changes to the earlier
agreements. The earlier loss share agreements covered only commercial assets. We have
updated the agreements to include single family assets and to require the application of a
systematic loan modification program for troubled mortgage loans. We strongly encourage our
loss share partners to adopt the Administration's Home Affordable Modification Program (HAMP)
for managing single family assets. If they do not adopt the HAMP, we require them to use the
FDIC loan modification program which was the model for the HAMP modification protocol. Both
are designed to ensure that acquirers offer sustainable and affordable loan modifications to
troubled homeowners whenever it is cost-effective. This serves to lower costs and minimize
foreclosures. We have also encouraged our loss share partners to deploy forbearance programs
when homeowners struggle with mortgage payments due to life events (unemployment, illness,
divorce, etc). We also invite our loss share partners to propose other innovative strategies that
will help keep homeowners in their homes and reduce the FDIC's costs.
In addition, the FDIC has explored funding changes to our structured transactions to make them
more appealing in today's environment. To attract more bidders and hopefully higher pricing, the
FDIC has offered various forms of leverage. In recent transactions where the leverage was
provided to the investors, the highest bids with the leverage option substantially improved the
overall economics of the transactions. The overall feedback on the structure from both investors
and market participants was very positive.
The Condition of the Deposit Insurance Fund
Current Conditions and Projections
As of June 30, 2009, the balance (or net worth) of the DIF (the fund) was approximately $10
billion. The fund reserve ratio -- the fund balance divided by estimated insured deposits in the
banking system -- was 0.22 percent. In contrast, on December 31, 2007, the fund balance was
almost $52 billion and the reserve ratio was 1.22 percent. Losses from institution failures have
caused much of the decline in the fund balance, but increases in the contingent loss reserve --
the amount set aside for losses expected during the next 12 months -- has contributed
significantly to the decline. The contingent loss reserve on June 30 was approximately $32 billion.
The FDIC estimates that as of September 30, 2009, both the fund balance and the reserve ratio
were negative after reserving for projected losses over the next 12 months, though our cash
position remained positive. This is not the first time that a fund balance has been negative. The
FDIC reported a negative fund balance during the last banking crisis in the late 1980s and early
1990s.6 Because the FDIC has many potential sources of cash, a negative fund balance does not
affect the FDIC's ability to protect insured depositors or promptly resolve failed institutions.
The negative fund balance reflects, in part, an increase in provisioning for anticipated failures.
The FDIC projects that, over the period 2009 through 2013, the fund could incur approximately
$100 billion in failure costs. The FDIC projects that most of these costs will occur in 2009 and
2010. In fact, well over half of this amount will already be reflected in the September 2009 fund
balance. Assessment revenue is projected to be about $63 billion over this five-year period, which
exceeds the remaining loss amount. The problem we are facing is one of timing. Losses are
occurring in the near term and revenue is spread out into future years.
At present, cash and marketable securities available to resolve failed institutions remain positive,
although they have also declined. At the beginning of the current banking crisis, in June 2008,
total assets held by the fund were approximately $55 billion, and consisted almost entirely of cash
and marketable securities (i.e., liquid assets). As the crisis has unfolded, the liquid assets of the
fund have been expended to protect depositors of failed institutions and have been exchanged for
less liquid claims against the assets of failed institutions. As of June 30, 2009, while total assets
of the fund had increased to almost $65 billion, cash and marketable securities had fallen to
about $22 billion. The pace of resolutions continues to put downward pressure on cash balances.
While the less liquid assets in the fund have value that will eventually be converted to cash when
sold, the FDIC's immediate need is for more liquid assets to fund near-term failures.
If the FDIC took no action under its existing authority to increase its liquidity, the FDIC projects
that its liquidity needs would exceed its liquid assets next year.
The FDIC's Response
The FDIC has taken several steps to ensure that the fund reserve ratio returns to its statutorily
mandated minimum level of 1.15 percent within the time prescribed by Congress and that it has
sufficient cash to promptly resolve failing institutions.
For the first quarter of 2009, the FDIC raised rates by 7 basis points. The FDIC also imposed a
special assessment as of June 30, 2009 of 5 basis points of each institution's assets minus Tier 1
capital, with a cap of 10 basis points of an institution's regular assessment base. On September
22, the FDIC again took action to increase assessment rates -- the board decided that effective
January 1, 2011, rates will uniformly increase by 3 basis points. The FDIC projects that bank and
thrift failures will peak in 2009 and 2010 and that industry earnings will have recovered sufficiently
by 2011 to absorb a 3 basis point increase in deposit insurance assessments. We project that
these steps should return the fund to a positive balance in 2012 and the reserve ratio to 1.15
percent by the first quarter of 2017.
While the final rule imposing the special assessment in June permitted the FDIC to impose
additional special assessments of the same size this year without further notice and comment
rulemaking, the FDIC decided not to impose any additional special assessments this year. Any
additional special assessment would impose a burden on an industry that is struggling to achieve
positive earnings overall. In general, an assessment system that charges institutions less when
credit is restricted and more when it is not is more conducive to economic stability and sustained
growth than a system that does the opposite.
To meet the FDIC's liquidity needs, on September 29 the FDIC authorized publication of a Notice
of Proposed Rulemaking (NPR) to require insured depository institutions to prepay about three
years of their estimated risk-based assessments. The FDIC estimates that prepayment would
bring in approximately $45 billion in cash.
Unlike a special assessment, prepaid assessments would not immediately affect the DIF balance
or depository institutions' earnings. An institution would record the entire amount of its prepaid
assessment as a prepaid expense (asset) as of December 30, 2009. As of December 31, 2009,
and each quarter thereafter, the institution would record an expense (charge to earnings) for its
regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment
until the asset is exhausted. Once the asset is exhausted, the institution would record an expense
and an accrued expense payable each quarter for its regular assessment, which would be paid in
arrears to the FDIC at the end of the following quarter. On the FDIC side, prepaid assessments
would have no effect on the DIF balance, but would provide us with the cash needed for future
The proposed rule would allow the FDIC to exercise its discretion as supervisor and insurer to
exempt an institution from the prepayment requirement if the FDIC determines that the
prepayment would adversely affect the safety and soundness of the institution.
The FDIC believes that using prepaid assessments as a means of collecting enough cash to
meet upcoming liquidity needs to fund future resolutions has significant advantages compared to
imposing additional or higher special assessments. Additional or higher special assessments
could severely reduce industry earnings and capital at a time when the industry is under stress.
Prepayment would not materially impair the capital or earnings of insured institutions. In addition,
the FDIC believes that most of the prepaid assessment would be drawn from available cash and
excess reserves, which should not significantly affect depository institutions' current lending
activities. As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances,
or 22 percent more than they did a year ago.7
In the FDIC's view, requiring that institutions prepay assessments is also preferable to borrowing
from the U.S. Treasury. Prepayment of assessments ensures that the deposit insurance system
remains directly industry-funded and it preserves Treasury borrowing for emergency situations.
Additionally, the FDIC believes that, unlike borrowing from the Treasury or the FFB, requiring
prepaid assessments would not count toward the public debt limit. Finally, collecting prepaid
assessments would be the least costly option to the fund for raising liquidity as there would be no
interest cost. However, the FDIC is seeking comment on these and other options in the NPR.
The FDIC's proposal requiring prepayment of assessments is really about how and when the
industry fulfills its obligation to the insurance fund. It is not about whether insured deposits are
safe or whether the FDIC will be able to promptly resolve failing institutions. Deposits remain
safe; the FDIC has ample resources available to promptly resolve failing institutions. We thank
the Congress for raising our borrowing limit, which was important from a public confidence
standpoint and essential to assure that the FDIC is prepared for all contingencies in these difficult
FDIC-insured banks and thrifts continue to face many challenges. However, there is no question
that the FDIC will continue to ensure the safety and soundness of FDIC-insured financial
institutions, and, when necessary, resolve failed financial institutions. Regarding the state of the
DIF and the FDIC Board's recent proposal to have banks pay a prepaid assessment, the most
important thing for everyone to remember is that the outcome of this proposal is a non-event for
insured depositors. Their deposits are safe no matter what the Board decides to do in this matter.
Everyone knows that the FDIC has immediate access to a $100 billion credit line at Treasury that
can be expanded to $500 billion with the concurrence of the Federal Reserve and the Treasury.
We also have authority to borrow additional working capital up to 90 percent of the value of
assets we own. The FDIC's commitment to depositors is absolute, and we have more than
enough resources at our disposal to make good on that commitment.
I would be pleased to answer any questions from the members of the Subcommittee. I could not
find the questions section yet but will.
Sources: Moody's Economy.com (borrowers "underwater") and FDIC estimate based upon
Mortgage Bankers Association, National Delinquency Survey, second quarter 2009 (number of
Source: Mortgage Bankers Association, National Delinquency Survey, Second Quarter 2009
Noncurrent loans are loans 90 or more days past due or in nonaccrual status.
Defined as commercial and industrial loans or commercial real estate loans under $1 million or
farm loans less than $500,000.
The FDIC reported a negative fund balance as of December 31, 1991 of approximately -$7.0
billion due to setting aside a large ($16.3 billion) reserve for future failures. The fund remained
negative for five quarters, until March 31, 1993, when the fund balance was approximately $1.2
Liquid balances include balances due from Federal Reserve Banks, depository institutions and
others, federal funds sold, and securities purchased under agreements to resell.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Oct. 16, 2009, 8:20 p.m. EDT · Recommend (2) · Post:
Bank failures create regional winners
Strong lenders benefit from buying troubled rivals seized by FDIC
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- The wave of bank failures washing over the
U.S. is creating opportunities for regional lenders that are strong enough to pick up
the debris, with help from the Federal Deposit Insurance Corp.
US Bancorp (USB 23.41, -0.60, -2.50%), BB&T (BBT 28.25, -0.36, -1.26%) and Zions
Bancorp (ZION 18.17, -0.65, -3.45%) have already benefited from buying failed banks in
so-called FDIC-assisted deals where the regulator promises to cover a lot of the future
losses on the assets being assumed.
Other banks that could do similar deals include Columbia Banking
System(COLB 15.36, -0.05, -0.32%), Hancock Holding Co. (HBHC 36.53, -0.44, -
1.19%) and People's United Financial Inc. (PBCT 16.15, +0.28, +1.76%), according to
Keefe, Bruyette & Woods.
Investors not charged up about fees
Even sophisticated investors don't pay attention to fees and expenses, but costs are crucial
to investment returns, says WSJ's Personal Finance columnist Jason Zweig. He speaks
with Kelsey Hubbard.
"We're soon going over 100 bank failures this year and that number could reach 500 or
more in future," Fred Cannon, an analyst at KBW, said in an interview.
KBW reckons a select group of regional banks with sufficient capital, credit quality and
management talent will be able to expand, either by rolling up failed institutions or
acquiring market share in other ways.
"If you can pick the winners in the regional bank space, there are real opportunities,"
In addition to Columbia, Hancock and People's United, KBW has compiled a list of 27
other banks that it says are poised to benefit by snapping up failed rivals. U.S.
Bancorp(USB 23.41, -0.60, -2.50%), Westamerica Bancorp (WABC 51.03, -0.23, -
0.45%), Iberiabank(IBKC 44.90, -0.83, -1.82%), PacWest Bancorp (PACW 18.25, -
0.39, -2.09%) and TCF Financial (TCBK 15.59, -0.03, -0.19%) are among the
acquisition-minded lenders on the firm's list.
"We're not sure which banks will get these FDIC deals, but we're pretty sure some of
them will," Cannon said. "So a basket of these names is a great place to be."
Banks are failing at the fastest rate in more than a decade as last year's financial crisis and
surging unemployment leave the industry nursing heavy loan losses. More than 1,000
banks may fail during the next three to five years, RBC Capital Markets estimated in
February. See full story.
Buying failed banks can be more profitable than acquiring healthy institutions.
When the FDIC tries to sell a collapsed bank, the regulator tells potential bidders what it
thinks the threshold for future losses will be. It then offers to share those losses with the
The FDIC usually agrees to take 80% of losses up to its forecast threshold and then 95%
of any losses above that. This means bidding banks have a good idea what their
maximum loss will be when they make an offer.
The price tags for failed institutions are also often negative -- meaning banks get paid to
take troubled firms off the FDIC's hands.
Banks will often pay a slight premium for the deposits of failed institutions, but they will
make bigger negative bids for the assets. So far this year, most purchases of failed banks
have carried negative price tags, according to FBR Capital Markets.
"With FDIC assistance, you basically get paid to do the deal -- cash in hand," Paul Miller,
an analyst at FBR, said in an interview. "The FDIC takes most of the risk of the loan
portfolio and you get the deposits basically for free."
These deals can "easily" generate returns on equity of 20% or more, with little risk,
A case in point: Prosperity Bancshares Inc. (PRSP 35.56, +0.45, +1.28%), which also
made KBW's list. In November 2008, Houston-based Prosperity acquired roughly $3.7
billion in deposits of failed Texas lender Franklin Bank from the FDIC.
Prosperity agreed to purchase just $850 million of Franklin Bank's $5.1 billion in assets,
so it didn't get a loss-sharing deal from the FDIC.
However, the transaction has still been a big boost for Prosperity, according to President
and Chief Operating Officer Dan Rollins.
Prosperity invested the deposits it got from Franklin in government securities and made
"a nice spread, which is what we do for a living," Rollins explained.
The bank has been building provisions for loan losses rapidly this year and the fees it
pays for FDIC insurance have shot up. But the bank is still reporting higher earnings.
"You have to attribute that to Franklin," Rollins said.
On Friday, Prosperity reported a 90% jump in third-quarter profit. Net interest income,
before provision for credit losses, jumped 34%. That was driven by a 36% increase in
average earning assets -- the result of the Franklin Bank deposits and assets that
Prosperity assumed from the FDIC.
Prosperity wants to do more of these deals and Rollins expects there will be ample
"Problem assets always lag the economy, so we still have multiple quarters of this cycle
to go," he said, recalling the rash of bank failures that started in Texas in the late 1980s.
"From 1988 to 1992, many banks failed in Texas, but the Texas economy was doing quite
well in the early 1990s," Rollins said.
However, Rollins' last point illustrates the potential pitfalls of investing in the regional
bank sector. With big loan losses still to come, some lenders will continue to suffer.
Indeed, the FDIC excludes some banks from bidding on failed institutions because they're
considered not financially strong enough or have weak management.
Regional banks are particularly exposed to commercial real estate, including construction
and development loans. These assets are considered by some analysts to be the next
source of major losses for the banking industry. See related story.
Construction and development loans are usually large, and losses on these assets can
appear unexpectedly for investors -- unlike residential mortgages where loss trends are
more predictable. Synovus Financial Corp. (SNV 3.62, -0.19, -4.99%), which has large
exposure to commercial real estate, may continue to suffer heavy loan losses, Stuart
Plesser, an analyst at Standard & Poor's Equity Research, said in an interview.
That means investors in regional bank stocks should prepare for a "wild ride," Plesser
Alistair Barr is a reporter for MarketWatch in San Francisco.
FDIC Approves Bank Plan
FDIC Approves Rules for Private Equity Buying Banks
The Federal Deposit Insurance Corporation has eased its restrictions on private equity firms buying banks
but even with this concession many private equity firms are not happy with the deal.
The FDIC voted 4-1 to approve a 10% capital requirement for banks owned by private equity firms. This is a
step back from the strict 15% tier 1 leverage ratio that was originally proposed. However private equity firms
must meet a much higher ratio than the 5% required of "well capitalized" banks and still higher than the 8%
tier 1 leverage ratio required of new banks.
The FDIC is looking to private equity firms to rescue the some of the 81 banks it has shut down this year and
others that have fallen in the recession and are expected to in the next few months. If buyers like private
equity firms do not purchase these banks the FDIC will have to cover the failed banks with its $13 billion
Although some private equity firms have already moved to buy stakes in banks, many seem to have been
waiting on the FDIC's ruling to see if its a profitable investment. The new policy suggests avoiding the
controversial capital ratio requirement by forming partnerships with current bank holding companies to bid
for failed banks. Another contentious issue is the requirement that private equity buyers hold onto the banks
for at least three years. This demand was kept and Chair Sheila Bair explained "We do want people who are
interested in running banks." A chief concern according to the FDIC is that private equity firms with little to
no experience in the banking industry will put the banks and taxpayers at risk.
The Private Equity Council is an advocacy group for several of the largest private equity firms and it has
been a key negotiator with the FDIC. Douglas Lowenstein, President of the Private Equity Council, has
already voiced its dissatisfaction with the ruling in a statement issued today:
“The revised FDIC guidelines represent an improvement over those originally proposed in July. But we
continue to question the need to impose more onerous capital requirements on private equity firms that
invest on behalf of retired police officers, firefighters, teachers, and other public employees.
“At a time when the nation’s banks are struggling to raise capital, it is counterproductive to impose measures
that could deter investors who are ready, willing and able to provide that capital. Higher capital thresholds
could make it less likely that private equity investors will bid on failed banks. At a minimum, it will reduce the
value of any bids, increasing the resolution costs for the FDIC and creating greater likelihood that the
agency will be forced to tap the $500 billion line of credit put up by American taxpayers. Given the well-
documented track record of private equity firms in turning around troubled companies, it also makes little
sense to deprive the banking system of needed expertise.
“That said, we appreciate the fact that the FDIC will review this guidance in six months. We hope that this
review will yield a long-term policy that will equally benefit the customers and communities of failed banks,
the FDIC, private investors, and the United States’ taxpayers.”
The Private Equity Council represents: Apax Partners; Apollo Global Management LLC;Bain Capital
Partners; The Blackstone Group; The Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts &
Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital.
This is an important issue for private equity and the banking industry so I have been covering this in some
detail. Here are some of the articles and resources on the FDIC's regulation of private equity firms investing
FDIC Private Equity
FDIC Proposes Strict Guidelines for Private Equity
The Federal Deposit Insurance Corp proposed tough guidelines for private equity firms to buy failed banks.
The FDIC announced Thursday a plan that calls for private equity groups to meet strong capital
requirements and commit to long-term investments, in order to purchase the collapsed banks.
The proposal requires private equity groups to consistently maintain strong capital in the banks, "specifically
a Tier 1 leverage ratio of 15 percent, for three years. They would also generally have to maintain the
investment in a bank for three years." Additionally, private equity groups must provide a "contractual cross
guarantee," in which a firm that owns two banks allows the healthier institution to provide aid for the weaker.
Private equity groups would also be discouraged from lending credit to their own investment funds, affiliates
or portfolio companies. Furthermore, private equity groups owning banks would need to major disclosures
about their ownership structure, giving regulators greater insight as to who is running the investment.
Bank regulators on the FDIC's board argued openly over the guidelines with some officials saying that such
tough measures will only scare off private equity investors, a much-needed source of capital for troubled
banks. While alternative investors may be the saving grace for the banks, as traditional sources of capital
have failed to rescue them. But bank regulators are nervous that allowing private equity groups to buy banks
may be less secure than with traditional investors that are subject to strict regulation by the SEC.
Yet other regulators, like Comptroller of the Currency John Dugan feel that opening up to private equity
investors will help the banks. He says, "I do fear that the current articulation of the proposal has standards
that go too far. There is real money and real capital that can provide savings to the deposit insurance fund."
On the other side of the fence are those who defend the strict guidelines, like FDIC Chairman Sheila Bair.
She argued that the requirements are necessary for ensuring the stability of the banks but admitted, "I'm not
sure we have it right here, but we do have a solid document."
Private equity firms have already started to move into the banking sector. Carlyle Group, Blackstone Group
(BX.N), WL Ross & Co. and Centerbridge Partners decided to invest $900 million toward rescuing Florida's
Firms poised to bet billions on real estate
This land in Baldwin County, Ala., was becoming a subdivision, but now sits dormant. The real
estate downturn has left swaths of distressed land across the country -- land that investors see as a
prime target. But the vulture firms have competition -- big builders.
By KEVIN L. McQUAID
Published: Tuesday, October 13, 2009 at 1:00 a.m.
Last Modified: Monday, October 12, 2009 at 10:10 p.m.
LAKEWOOD RANCH - Starwood Land Ventures LLC does not like to think of itself as the 800-
pound vulture in the residential real estate room.
FUNDS SEEING OPPORTUNITY
• STARWOOD LAND VENTURES:
A Lakewood Ranch affiliate of Starwood Capital Group, founder of the Westin Hotel chain and
other companies, Starwood Land began in 2007 with the aim of acquiring $500 million in
residential land in states like Florida, Arizona and California. To date, it has purchased $55
million in assets.
• VANGUARD LAND LLC:
This Sarasota firm was created last year by John Peshkin, a former Taylor Woodrow chief
executive and founder of Starwood Land. Vanguard is focusing on acquiring residential land in
Florida, and to date has bought lots in Venice’s Pennington Place community and elsewhere.
• ROCKWOOD CAPITAL LLC:
Rockwood Capital is a New York-based private real estate investment company that now
manages roughly $2.7 billion of equity commitments. Since 1980, the company has invested
$11.6 billion in all, including office towers in New York City and the Reston community of
• D.E. SHAW & CO.:
Started by a former Columbia University computer science professor in 1988, D.E. Shaw & Co.
is among the nation’s largest private equity firms now hunting for real estate deals. In all, the
company now has $29 billion in assets and 1,600 employees worldwide.
• PAULSON & CO. INC.:
A New York-based hedge fund with some $36 billion in assets under management, Paulson &
Co. has aggressively purchased foreclosed real estate, troubled loans and mortgage backed
securities. The firm, run by John A. Paulson and begun in 1994, has also begun lending capital to
other hedge funds and banks. In January 2008, it announced that former Fed chief Alan
Greenspan was joining the company’s advisory board.
• WALTON STREET CAPITAL LLC:
Walton Street Capital LLC is a private equity firm founded in 1994 to invest primarily in real
estate. To date, Walton has invested or has committed to invest roughly
$3 billion of equity in about 150 separate transactions.
• Banks set to become region's largest landholders
• Locals hit in building shakeout
"We're an opportunity fund," said Mike Moser, the Lakewood Ranch-based company's East Coast
president. "We're trying to invest in very, very high-risk, high-reward properties."
Even so, the vulture analogy is an apt one for the two-year-old company, an affiliate of
Connecticut Starwood Capital Group, best known for launching the successful Westin hotel
chain, lender iStar Financial and links operator Troon Golf.
With roughly $500 million available to sop up distressed residential lots, soured real estate loans
and undeveloped property, Starwood Land is in an enviable position to capitalize on what it
believes will be a significant change in the way home builders operate from now on.
To date, Starwood Land has bought $55 million worth of real estate or debt that represents 2,500
lots, in California, Arizona and Florida.
But a funny thing has happened to Starwood and competitors like Vanguard Land LLC, Walton
Street Capital, D.E. Shaw & Co. and Paulson & Co. on the way to cashing in on the overheated,
devastated residential real estate industry: Publicly held, national home builders, though
staggered, have recovered -- somewhat.
Despite the lack of new sticks and bricks in many markets -- and hundreds of millions of dollars
in land position write-downs -- builders like NVR Ltd., Lennar Corp., Toll Bros., Pulte Homes
Inc. and others are active, and have managed to hoard cash. Lots of it. Nor do they appear afraid
to spend it.
NVR, of Virginia, recently spent about $40 million to buy land around Washington, D.C., that
was being shed from WCI Communities Inc.'s federal bankruptcy case.
Miami-based Lennar, for instance, has $1.44 billion on hand, according to filings with the U.S.
Securities and Exchange Commission. Pulte, a Michigan company that in August won
shareholder approval to merge with giant Texas-based builder Centex Corp., had $3.4 billion in
cash on hand as of March 31, company data shows.
"Everybody in the industry has been amazed at how the public builders have come back into the
market in the past 90 days," said Marc Perrin, a Starwood Capital managing director who
oversees the Starwood Land.
"They've been much more aggressive in buying up lots," Perrin said. "Certainly no one in January
thought they'd be there and be active.”‘ Disconnected from the value'
Lenders have not exactly fallen in line with Starwood Land's business plan, either.
When the company formed, its principals believed beleaguered banks -- fat with unwanted,
foreclosed properties and inundated with bad real estate loans -- would be eager sellers. But that
has not occurred.
In addition to not lending for real estate these days, many banks still are not selling their seized
properties, and those that are selling have yet to fully re-evaluate the assets or debt on their books.
"Nine out of 10 times, the price banks are selling at are disconnected from the value of what the
property is today," said John R. Peshkin, chief executive of Taylor Woodrow North America until
August 2006 and Starwood Land's founder, who left the company after a year.
Meanwhile, the commodity Starwood Land is after -- land -- has fallen more than any other real
estate asset class, experts say.
"Undeveloped land seems to have no economic value," said Peshkin, who now runs Vanguard
Land, a private equity firm that is buying property in Venice and elsewhere.
"It's a pretty sad state of affairs," said Peshkin, whose firm includes his son, Daniel, and Taylor
Woodrow's former director of acquisitions. "Land has gone down in price to where it was 15
years ago. It's a unique time."
As a result, Starwood Land has rewritten its playbook a bit.
"Our business plan has changed somewhat," said Moser, who was Taylor Woodrow's tower
division president before joining Starwood Land in January 2008. "We originally thought we'd
spend $1 billion on acquisitions. That may have been a bit ambitious."
"We've concluded the opportune buying time will be a year or two years from now, whereas we'd
originally thought we'd have everything acquired by now," Moser said.
What Starwood Land has not done, however, is change its focus. The company has stayed lean --
it has just seven employees -- and still searches for only top-tier land deals of $5 million and
above, in select markets.
To gain a further advantage, Starwood Land has partnered with seven builders or residential
developers in markets like the Mid-Atlantic, California, the Carolinas, Texas and elsewhere.
Nor has Starwood Land compromised on its profit expectations. It still expects to reap at least a
20 percent gain on every deal.
"We have to underwrite tremendous risk associated with the deals we do," Moser said.
Decidedly in Starwood Land's factor going forward, Moser and others say, is what is expected to
be a long-term, fundamental change in the way home builders buy and hold land.
In the past, builders would buy up large tracts of land at a time, and then sell them along with
their homes. During the nationwide real estate boom, from 2003 to 2006, competition forced
many builders to snap up larger and larger tracts of property.
But holding land cost builders and developers dearly when values fell and home sales stalled
beginning in 2006.
Toll Bros., one of the nation's largest builders, was forced earlier this year to write down more
than $450 million worth of land it could not build on.
"I think for some time to come, builders will still take the posture that they'll want someone else
to take the land risk in deals," said Peshkin, who has been named to a new board at Bonita
Springs-based WCI Communities, which is emerging from bankruptcy protection.
Moser and others believe builders will want to acquire only a few lots at a time and build on them
before buying more land. Publicly-traded builders, especially, are likely to be under intense
pressure to keep land holdings to a minimum, Moser and others said.
If that holds true, Starwood Land's and Vanguard's buy-and-hold philosophy could reap huge
rewards -- especially since Starwood Land also plans to provide equity financing and enter into
joint ventures with builders on new projects.
Until that happens, Moser said, Starwood Land will continue hunting for quality deals in top
markets like Orlando, where the company hopes to complete a purchase of 500 home lots before
"Deal flow is still a little slow at this point, but we believe it'll come," Moser said. "We believe in
two years, actually, there will be a lot shortage in the better markets -- places like Orlando, Dallas
and Atlanta. And that's because inventory is getting chewed up a lot faster than most people
Man on a Mission
By Michael Sisk
The nation's biggest banks may be getting their financial footing, but as 2009 comes to a
close the bad news mounts for many regional and community banks. Real estate-related
losses continue to pile up and most experts are predicting that hundreds of more banks
could fail before the crisis subsides.
Then there is First Niagara Financial Group Inc. in Lockport, N.Y. - one mid-tier banking
company that is ending the year on a roll.
Led by its charismatic chief executive, John Koelmel, First Niagara has raised close to $1
billion in three separate stock offerings since the fall of 2008 and used much of the proceeds
to strike two big deals - first for 57 Bank branches in western Pennsylvania, and then for the
embattled Harleysville National Corp. in suburban Philadelphia. By the time the deal for the
$5.6 billion-asset Harleysville closes in early 2010, First Niagara will have doubled its assets
in less than a year, to $20 billion, and significantly expanded its footprint beyond the confines
of upstate New York.
Flush with capital and not burdened by asset quality issues, First Niagara is not done
dealing, either. Just as banks a generation ago expanded by rolling up troubled or failing
thrifts, Koelmel - a first-time CEO who's been on the job just three years - is determined to
take advantage of the current turmoil to transform First Niagara into a regional power,
says John Gorman, a partner at LuseGorman Pomerenk & Schick in Washington and a long-
time advisor to First Niagara.
"There are companies that made their mark by the way they came through the [savings-and-
loan] crisis," says Gorman. Koelmel "sees the opportunity that way.” Says Koelmel: "Our
aspirations are to be something more than we are, something more than we will be even with
There are potential obstacles, to be sure, starting with the challenge of integrating two
franchises in a new state and maintaining First Niagara's strong asset quality in a still-
But analysts and other observers who, in the last three years, have watched First Niagara
evolve from an underperforming company that was under pressure to find a buyer to one of
the industry's shining stars aren't about to bet against Koelmel."If all executives ran their
companies like First Niagara, we would not have had a financial crisis," says Rick Weiss, an
analyst at Janney Montgomery Scott. "It's as simple as that."
LOCAL BOY MAKES GOOD
Koelmel, 57, grew up in Orchard Park, N.Y., just outside of Buffalo, where his dad was a
salesman for General Electric and his mother was a schoolteacher. When he went off to
attend The College of Holy Cross in Worcester, Mass., in 1970 he figured he'd wind up in
Boston or New York, but upon graduation, his aptitude for math took him on a round of
interviews with the Big Eight accounting firms and, eventually, to Peat Marwick's Buffalo
Koelmel says he showed up "with hair too long, pants a bit too wide and red shoe with heels
more than a bit too high," Koelmel says. "It was the Saturday Night Fever days and I had all
the disco Danny looks."
Bob Weber, then a manager in the Buffalo office, remembers immediately taking a shine to
the shaggy local boy who didn't fit the accounting stereotype. Like many youth Koelmel could
be intemperate, and Weber often had to reel in his young protégé.
"I saw a lot of talent. But in his formative years he'd speak his mind with superiors and get
himself in a little bit of trouble," Weber says. "At regional meetings he'd disagree with what
they were saying, and later I'd tell him, 'John, you might think that way, but don't shoot
yourself in the foot.'"
Koelmel took those early lessons to heart and rose rapidly through the ranks as the
accounting firm got larger and eventually merged with KPMG. When Weber retired in 1995,
Koelmel replaced his mentor as the managing partner of the Buffalo office.
Many of Koelmel's clients back then were banks, and what he liked best was working with
management to help develop strategic plans. But by the end of the 1990s, he sensed a
"philosophical shift" in which accountants who worked too closely with clients were perceived
as biased and unable to objectively evaluate their finances. "It was increasingly harder for
me to have that trusted advisor relationship with clients that I'd had for 20 or 25 years,"
Koelmel says. "I realized that my ability to add value and derive satisfaction day-in-and-day
out was waning and I worried would diminish quickly."
So in 2000, Koelmel left KPMG for the No. 2 job at Five Star Bank in Warsaw, N.Y. It wasn't
quite the right fit, though, and he left after a couple of years.
After that, for the first time, he began to seriously ponder what else he might do with his life.
He interviewed to run a private school, contemplated seats on corporate boards, considered
consulting, and even worked at a friend's collections company. "I was enjoying the flexibility,
and I asked myself whether I wanted to get back on the corporate treadmill."
That all changed in early 2003 when Koelmel reconnected with then-First Niagara CEO Bill
Swan. Koelmel knew Swan from his KPMG days and soon the two began to discuss whether
there might be a role for Koelmel at the bank. Then, a few months later, there was a tragic
turn of events. Swan, also the chairman of the board of trustees at St. Bonaventure
University, grew despondent over a basketball scandal at his alma mater and took his own
Just days earlier, Swan had announced that First Niagara was buying the $1 billion-
asset Troy Savings Bank in what was then its largest deal ever. Under Swan, First Niagara
began an aggressive expansion into the Albany, N.Y., market, and Koelmel says his death
was a catalyst for him and others "to step up and step in to perpetuate what Bill set in
Koelmel ultimately joined First Niagara as chief financial officer in January 2004 and in
December 2006 he was named interim CEO when Paul Kolkmeyer stepped aside. In
February 2007 he officially became CEO.
His first few months on the job were rocky as shareholders, frustrated by its sagging share
price, pressured the company to find a buyer or - as many of its Rust Belt peers did - expand
into faster-growing states, such as Florida. Koelmel, though, wasn't interested in either and
instead struck a low-premium, in-market deal for Greater Buffalo Savings Bank in late 2007
that won him praise from the investment community.
Critics were further quieted by First Niagara's performance, which as mortgage crisis
worsened, began looking better and better relative to the rest of the industry.
Koelmel does not profess to have some magic formula for keeping First Niagara out of
trouble. He's steered clear of the worst of the financial crisis by following some basic
principles of banking: carefully manage capital, credit underwriting, and liquidity.
"Those that lost their focus took a wrong path, whether geographically stretching too far too
fast, or pursuing product alternatives that were misguided," he says. "The whole industry
took on way too much risk for way too little reward."
After keeping a tight hold on the reins during the boom years, Koelmel sprang into action in
the fall of 2008. He managed to raise $115 million just a few weeks after the collapse
of Lehman Bros. - when the capital markets were essentially frozen - and soon thereafter
accepted $184 million from the Treasury Department's Troubled Asset Relief fund.
In an interview with U.S. Banker in late 2008 he said the rationale for raising the capital was
simple. "We're going to play offense, and to do that you need capital," he said. "There will be
opportunities to lend more significantly over the next year or two and grow in our footprint
The first big score occurred in April when First Niagara announced it would acquire
the National City branches, which PNC Financial Services Group Inc. of Pittsburgh was
divesting as a condition of buying Nat City. The deal, which closed in September, included
$3.9 billion in deposits and $757 million in performing loans, and to finance it, First Niagara
entered into a securities purchase agreement with PNC for a total of $150 million. (The 12
percent notes are callable without penalty at any time.) After raising another $380 million in
April, then paying back TARP in May, Koelmel struck again, announcing the $237 million all-
stock purchase of Harleysville, which has 83 branches in the Philadelphia area. The deal
was priced at about 110 percent of tangible book value and included a novel provision that
adjusted the exchange ratio should Harleysville's loan delinquencies rise above a certain
level between the announcement and the close of the deal.
Tom Alonso, an analyst at Fox-Pitt Kelton, says he gives Koelmel and his team credit for
capitalizing on a "once in a generation opportunity to expand the franchise in a tight time
frame to a much bigger geographic footprint."
Gorman, meanwhile, says the deals were vintage Koelmel. While Koelmel has made no
secret of his growth ambitions, one thing he won't do, Gorman says, is overpay.
"Some CEOs get starry-eyed, they get caught up in the momentum of the deal. It gets to
where they've got to get the deal, no matter what - what's another 50 cents a share? But
that's not John."
PLOTTING THE FUTURE
Weiss says two acquisitions right on top of each other pose "integration challenges," though
he points out that Koelmel and his management team had some practice after First Niagara
bought Troy Savings and Husdon River Bank at roughly the same time earlier this decade.
On the physical integration of the Harleysville and Nat City franchises, Koelmel says his job
is to "make sure we have the right resources in place and then I get out of the way. The team
is incredibly good at that physical integration."
On the cultural side, he takes a more active part. "I establish the tone, I personalize the
company. I make it real and engage across the new organization so that people feel
connected.” It’s a role that plays well to his strengths, says Tom Bowers, First Niagara's
chairman. "He's a really strong communicator in both the written and spoken word. He's an
unusual combination of CPA and charisma."
Mostly, though, Koelmel spends his time doing what he enjoys most: plotting the next move.
"My job is to look ahead and keep running up the next hill and stay focused on opportunities.
That requires us to have capital; it requires us to be nimble and to respond to opportunities,"
Koelmel cites three main levers for M&A growth over the near term. First, he expects to
acquire customers and perhaps branches from big banks operating in First Niagara's
footprint, such as Bank of America and Citibank.” They can't access enough capital in this
new regulatory environment to support their business model and that means they have to
shrink and shed not just assets but deposits," he says.
Second, he reckons that the tough economic environment and new regulatory requirements
will force some smaller banks that had been fighting to remain independent to throw in the
towel. And, finally, he's looking for opportunities to buy failed banks - but he won't stray too
far.” These show up in my email every day, but none have been in our footprint," Koelmel
says. "We'll be eyes wide open for FDIC- assisted transactions, but we'll be disciplined and
diligent so we don't stretch ourselves too far and increase execution risk."
Koelmel says he won't rule out expanding into Ohio, Michigan, New England or the Mid-
Atlantic states, but his priority is to fill in the wide gaps in New York and Pennsylvania. In
New York, First Niagara has a strong presence in the Buffalo and Albany areas, but only a
smattering of branches in between. In Pennsylvania, its branches will be largely
concentrated in the state's two largest cities, Philadelphia and Pittsburgh, which are
separated by roughly 300 miles.
"Long-term shareholder value will come from staying relatively narrowly focused and
deepening our market share to become a premier player in each market, versus being a mile
wide and an inch deep," Koelmel says. The growth plan also includes a relocation of the
company's corporate headquarters from Lockport to Buffalo, a move Koelmel says will
further raise First Niagara's profile.
"In five years we'll have further emerged as a strong regional player in the new world order of
financial services," he says.
• SEPTEMBER 11, 2009
Ross Gets Nod for a Bank Charter
Approval Opens Door for Bid on Failed Firms, as Related Cos. Seeks Corus Assets
By NICK TIMIRAOS
Real-estate mogul Stephen M. Ross and the two other partners in his company,
Related Cos., have been granted preliminary approval by regulators to charter a new
bank, a move that would allow them to bid on failed institutions seized by the
The approval comes at a time that Related, a national real-estate developer known for
such high-profile projects as Time Warner Center in New York, vies with a stable of
private-equity and real-estate firms to buy the assets of condo lender Corus
Bankshares Inc. With assets of $7 billion, Corus has warned that it is "critically
undercapitalized," and many observers expect it to be seized by regulators soon.
As investors began circling Corus last spring, the Related partners filed an application
with the Office of the Comptroller of Currency to form SJB National Bank, headed by
Mr. Ross and Related executives Jeff Blau and Bruce Beal Jr. The OCC gave them
preliminary approval in late July, according to a letter the agency released last month.
Related would have no ownership interest in the bank.
SJB's application didn't reference a specific acquisition target. But the OCC's approval
letter said that SJB Bank wouldn't "commence operations until after its bid for a
particular institution is accepted" by the Federal Deposit Insurance Corp. A lawyer for
SJB declined to comment.
According to the OCC approval letter, SJB Bank proposed as its chief executive
Adolfo Henriques, a veteran Miami banking executive who in July was named
chairman of Gibraltar Private Bank of Coral Gables, Fla. The OCC also approved
Stuart M. Rothenberg, Goldman's former head of real-estate investments, as a
potential bank director. Messrs. Henriques and Rothenberg didn't respond to requests
The government's interest in attracting private capital to troubled banks has grown as
the swelling number of bank failures strains the FDIC's fund. There have been 89
failures this year.
Globe Photos/Zuma Press
Related Cos.' Stephen M. Ross and two partners won approval to charter a bank -- if a
bid for a 'particular institution is accepted.' Below, the Time Warner Center in New York
could get company in Related's real-estate portfolio.
Until now, most of the bank failures have been tied to the housing downturn and
souring home loans. Corus Bank exemplifies a new crop of troubled institutions where
pressure is growing from deteriorating construction and commercial real-estate loans.
Corus's condominium and other real-estate loans have drawn interest from investors
because the 111 developments backing that debt are generally regarded as top-
By contrast, Corus's banking franchise hasn't attracted much interest because the
lender has only 11 branches and attracts deposits primarily by selling online
certificates of deposit with above-market interest rates.
Bank regulators have split the assets and deposits of Corus and are soliciting bids for
both units in an effort to draw higher bids for the FDIC-brokered auction. Related itself
has teamed with Lubert-Adler Partners LP, a real-estate investment firm, and other
investors to bid on the assets of Corus. The regulators' split makes it unnecessary for
SJB to purchase the entire bank in order for Related and its partners to win control of
Corus's condo assets.
Still, being able to bid on both the deposits and the assets of a bank could give a
potential bidder a competitive leg up. "The advantage to the FDIC of selling both the
assets and the liabilities to the same institution at the same time is that the FDIC
doesn't have to write as big a check," said John Douglas, a former general counsel at
Other investors in the running to buy Corus's assets include Miami-based developer
Crescent Heights and Dallas-based investor Lone Star Funds, Colony Capital LLC
and iStar Financial Inc., and Starwood Capital Group. Bids on Corus assets, originally
due on Tuesday, have been pushed back by at least two weeks, according to people
familiar with the matter.
Mr. Ross, who in January completed his purchase of the Miami Dolphins football
franchise, is the founder and chief executive of the closely held Related. Like other
developers, the company has faced problems in the economic downturn. In February,
it delayed for one year its $1 billion purchase of development rights to a 26-acre
parcel on Manhattan's West Side, and its multibillion-dollar Grand Avenue project in
Los Angeles remains stalled.
But Related also is positioned well to ride out the worst commercial real-estate market
in decades. In late 2007, just before the market began to crater, Related raised $1.4
billion from Goldman Inc., an investment arm of Abu Dhabi, and other investors.
Separately, Ernst & Young LLP resigned last week as Corus's outside accounting
firm, the bank said in a Securities and Exchange Commission filing on Friday. The
bank said it isn't currently seeking a replacement. That resignation came days before
Corus's own accounting chief left the company.
Write to Nick Timiraos at email@example.com
The FDIC's Statement Of Policy On Qualifications For
Failed Bank Acquisitions.
Originally published August 31, 2009
The Board Of Directors of the Federal Deposit Insurance Corporation ("FDIC") has
adopted its final Statement of Policy on Qualifications for Failed Bank Acquisitions (the
"Acquisition Policy Statement") by a 4-1 vote.1 As adopted, the Acquisition Policy
Statement applies to investments by "private capital investors," which term appears to
be the FDIC's name for private equity funds ("PEFs"), albeit the scope of application of
the Acquisition Policy Statement remains unclear (as discussed in Section II of this
memorandum) and will afford the regulators considerable discretion in its application.2
While the Acquisition Policy Statement is not as burdensome to PEFs as would have
been the case under the Proposed Guidelines,3 as discussed in our prior Memorandum
of July 15, 2009,4 it nonetheless imposes burdens on PEFs that will not apply to other
investors in banks or thrifts. Accordingly, PEFs should give substantial consideration to
structuring an acquisition in a manner that avoids application of the Acquisition Policy
Statement. It appears to be possible to avoid application of the policy if a private capital
investor partners with an established bank or thrift that has (i) a "strong majority"
interest" in the acquisition transaction, and (ii) a "successful history" operating insured
depository institutions (which we shall term the "Experienced Partner Exemption"). It will
be desirable to consult early in acquisition planning with the FDIC and other bank
regulators to determine whether the private capital investor will be able to benefit from
the Experienced Partner Exemption.
I. BACKGROUND TO THE ACQUISITION POLICY STATEMENT: COMPETING
CONSIDERATIONS The Acquisition Policy Statement was adopted against a
background of increasing numbers of banks failures eroding the FDIC's Deposit
Insurance Fund ("DIF"). As of August 31, 84 banks have failed this year. The DIF has
shrunk by 75% from its level in January 2009. In addition, the FDIC is about to collect a
special assessment from banks to replenish the DIF, and is already discussing the need
for a second special assessment. Thus, on the one hand, the regulators would clearly
like to bring new capital into the banking industry; on the other hand, it appears that new
capital will not be treated equally with old capital.
During pre-vote consideration of the Acquisition Policy Statement, the FDIC Vice
Chairman stated rather bluntly, "we need to attract bidders [for failed banks]" while FDIC
Chairman Bair appeared comfortable that PEFs would be willing to bid on failed banks in
light of the revisions made to the Proposed Guidelines by the Acquisition Policy
Statement. The Acting Director of the Office of Thrift Supervision ("OTS"), the only Board
member who voted against adoption,5 stated bluntly, prior to the vote, that the
Acquisition Policy Statement essentially singled out non-bank investors as persona non-
grata in the banking industry without adequate justification or inquiry.6
Chairman Bair noted that PEF buyers lacked "a buyer's balance sheet" and suggested
that their opacity could put the FDIC at significant risk, especially in light of FDIC loss-
sharing arrangements with certain buyers.7 She also asserted that PEFs were notorious
for a short-term mindset with respect to their investments, and that such an approach
might have an adverse long-term impact on the prospects of the target institution and the
banking industry generally. In any event, the general view expressed by those voting in
favor of the Acquisition Policy Statement was that the FDIC had struck a proper balance
among competing public interests.
II. THE ACQUISITION POLICY STATEMENT: SCOPE AND APPLICABILITY The
Acquisition Policy Statement technically applies to:
private investors in a company, including any company acquired to facilitate bidding on
failed banks or thrifts that is proposing to, directly or indirectly, (including through a shelf
charter) assume deposit liabilities, or such liabilities and assets, from the resolution of a
failed insured depository institution; and
applicants for insurance in the case of de novo charters issued in connection with the
resolution of failed insured depository institutions (hereinafter "Investors"). This covers
investors in a company acquired to facilitate bidding and, of course, applies to investors
in firms using a shelf charter to acquire liabilities of a failed bank or thrift.
Despite comments requesting greater precision in the definition of "private capital
investor," the FDIC left the definition vague, giving the agency greater scope of authority
to determine the definition by interpretation. The Acquisition Policy Statement indicates
that, "the requirements it imposes on investors only apply to investors that agree to its
terms," which would seem to suggest that in practice the application of the Acquisition
Policy Statement will be open to discussion on a case-by-case basis with potential
investors. Nevertheless, the FDIC may have the view that any "private capital investor"
that voluntarily bids on a failed bank or thrift after adoption of the Acquisition Policy
Statement is implicitly agreeing to be bound by the terms of the policy.
A. Club Deals While the clear intent of the Acquisition Policy Statement is to reach
PEFs, its terms apply to "private capital investors," which is broad enough to cover so-
called "club deals" in which no single PEF "controls" the bank or thrift.8
B. Experienced Partner Exemption The Acquisition Policy Statement would not apply to
new investors partnering with existing banks or thrifts that have a "strong majority
interest" in the acquired bank or thrift and a history of successful operation. The
regulatory concern embodied in the Acquisition Policy Statement is clearly with new
entrants to the banking industry. Indeed, the Vice Chairman of the FDIC expressly
suggested that PEFs should partner with existing banks and thrifts, and the Acquisition
Policy Statement expressly states that "[s]uch partnerships are strongly encouraged."
However, the Acquisition Policy Statement is ambiguous as to whether, for instance, a
PEF minority investment paired with an existing investor that had a 51% majority interest
would be subject to the Acquisition Policy Statement.
One also has to ask whether a "private capital investor" in a bank that acquires a failed
bank would be caught up in the Acquisition Policy Statement literally as a "private
investor in a company proposing to assume liabilities" of a failed bank or whether that
investor is exempt as being deemed to have partnered with the bank in which it has
invested. It is conceivable that the answer might even turn on whether the acquiring
bank in which the investor took a direct interest has an established record for successful
operation or has itself had problems.
C. Small Investments In order to exclude de minimis investments from its scope, the
Acquisition Policy Statement, by its terms, does not apply to investors with five percent
or less of the total "voting power" of the acquired bank or thrift or holding company
provided there is no evidence of concerted action. That said, the Acquisition Policy
Statement does not set forth what constitutes evidence of concerted action, and leaves
uncertainty as to whether the mere existence of an organizer who solicits several less-
than-five percent investors would be sufficient to give rise to "concerted action" and loss
of the de minimis exemption.
D. Duration Of Requirements An acquirer subject to the Acquisition Policy Statement
may apply, after seven years, to be released from the requirements of the policy if the
bank it has acquired has continuously maintained a CAMELS 1 or 2 rating.9 It would
seem unlikely, however, that the successor to a failed bank or thrift would on the
acquisition date be awarded the highest ratings immediately (and then could sustain that
rating for seven years).10 In a more likely scenario, it would take some time for the
acquired bank to achieve the rating, meaning that the Acquisition Policy Statement could
apply to an acquisition for materially longer than seven years after the acquisition date.
III. THE PROPOSED GUIDELINES MODERATED IN THE ACQUISITION POLICY
STATEMENT The Proposed Guidelines would have imposed eight basic requirements
on a PEF buying a failed bank, including the source of strength commitment to maintain
the bank's capital levels.11 These requirements would likely have very materially
discouraged investment by PEFs into the banking system. Three aspects of the
Proposed Guidelines received the greatest attention from commenters: the heightened
capital requirement, the source of strength commitment, and the cross-guarantee
provision. These three requirements have been moderated somewhat in the Acquisition
Policy Statement, primarily due to the reasons outlined below.
A. Capital The Proposed Guidelines included a requirement that a failed bank acquired
by a PEF maintain a 15% Tier 1 leverage ratio.12 That would have been triple the high-
end range for well-capitalized banks and double the industry average. It would have put
such a bank at a competitive disadvantage, reduced returns, and, some argue,
Historically, the FDIC has treated the acquisition of a failed bank or thrift as the creation
of a de novo institution - that is, it is as if the bidder acquiring the failed bank was
applying to the FDIC to open a new bank. As the FDIC has indicated, de novo banks
have a higher risk profile than established banks and are overrepresented on the list of
banks that have failed, often exhibiting inadequate controls and risk management.
Accordingly, the FDIC is of the view that heightened capital levels at such "new"
institutions are warranted.13
B. Source Of Strength The Proposed Guidelines would have required a "private capital
investor" to serve as a source of financial and managerial strength to the acquired bank
and to require holding companies in which a "private capital investor" had invested to
sell equity or issue debt that qualified as capital. This vague requirement could have
imposed unlimited liability on a "private capital investor" and made it difficult for it to raise
funds. It is instructive to note that a PEF's organizational documents often limit the extent
to which the PEF may provide capital support or make follow-on investments in its
portfolio companies - thus it often would not have been possible for the PEF to comply
with any source of strength requirement. The source of strength commitment has been
eliminated from the Acquisition Policy Statement.
C. Cross-Guarantee The Proposed Guidelines also would have required a PEF that has
majority interests in more than one bank or thrift to pledge to the FDIC its interest in
each bank or thrift to guarantee the FDIC against loss caused by the failure of any such
bank or thrift. This would have imposed a risk that most PEF investors would have
declined to accept. The cross-guarantee provision has been reduced in scope to a
cross-support provision, as described in Section IV.C below.
IV. SPECIFIC REQUIREMENTS OF PEFS IN THE ACQUISITION POLICY
STATEMENT A. Capital The Acquisition Policy Statement requires a Tier 1 common
equity14 ratio of ten percent for the first three years with a requirement thereafter that
the bank remain well capitalized.15 However, the FDIC retains the flexibility to impose a
higher capital requirement on a case by base basis depending on the business plan and
experience of the acquirer. As in the Proposed Guidelines, a failure to maintain the
heightened capital levels required under the Acquisition Policy Statement would require
the FDIC to treat the institution as "undercapitalized" for purposes of Prompt Corrective
B. Source Of Strength As indicated, the Acquisition Policy Statement drops the source of
C. Cross-Support The cross-support provision of the Acquisition Policy Statement only
applies if the "private capital investor" owns eighty percent or more of multiple banks or
thrifts. Where such common ownership is present, the "private capital investor" must
pledge to the FDIC its interest in the shares of commonly owned institutions as security
against any losses the FDIC might suffer as a result of the failure of any of the
D. Transactions With Affiliates Extensions of credit18 by the bank to its investors and to
"affiliates"19 of those investors would be prohibited.20 "Private capital investors" must
regularly report to the bank the identity of all such affiliates to enable the bank or thrift to
identify those affiliates and avoid extensions of credit to them.
E. "Silo" Structures The Acquisition Policy Statement indicates that the FDIC would not
approve ownership structures in which a "private capital investor" (or its sponsor)
establishes multiple investment vehicles funded and apparently controlled by the "private
capital investors" (or their sponsors) to acquire a bank or thrift. Apparently, the FDIC
considers such structures to be evasions of bank holding company laws and regulations
and is concerned that they separate ownership from control.
F. Secrecy Law Jurisdictions Generally, "private capital investors" from "secrecy law
jurisdictions" are not permitted to bid for a failed bank. A "secrecy law jurisdiction" is one
that, inter alia, precludes U.S. bank regulators (i) from garnering sufficient information to
ensure compliance with U.S. laws or (ii) from obtaining information on the competence,
experience, and financial condition of the investors and related parties.21 A country that
permits off shore entities to operate shell companies would also be considered a
"secrecy law jurisdiction." This could affect a PEF with a large base of non-U.S.
investors. An exception is provided for the case of an investor from a secrecy law
jurisdiction that is a subsidiary of a company that is subject to comprehensive
consolidated supervision recognized by the Federal Reserve Board that consents to a
number of promises of cooperation.
G. Continuity Of Ownership Ownership in the failed bank must be maintained for three
years, as in the Proposed Guidelines. A new exception in the Acquisition Policy
Statement permits the "private capital investor" to sell its interest in the acquired
institution before the end of the three year commitment period where the "private capital
investor" is a mutual fund.22 The three year requirement would seem to bar acquiring a
failed bank, turning it around, and taking it public to raise capital within three years.
H. Special Owner Bid Limitation Investors that directly or indirectly own ten percent or
more of a failed bank or thrift would not be allowed to bid on the assets or liabilities of
that bank or thrift, even if such investors were not at fault for the bank's failure. Ironically,
the FDIC has a statutory duty to pursue the "least cost resolution" of a failed bank or
thrift, and it is conceivable that this aspect of the policy could, at least in a rare case,
place the FDIC in violation of that statutory duty.23 Also ironically, a manager that
caused a bank to fail would not be precluded by the Acquisition Policy Statement from
bidding if he or she owned less than ten percent of the bank.24
I. Disclosures "Private capital investors," and their investors as well, would be required to
disclose information to the FDIC as the FDIC deems necessary. Such information would
include information about the size of the capital funds, diversification, return profile,
marketing documents, management team, and business model. Such disclosures would
1. See Final Statement of Policy on Qualifications for Failed Bank Acquisitions, available
at http://www.fdic.gov/news/board/Aug26no2.pdf. The Acquisition Policy Statement was
approved on August 26, 2009.
2. Ordinarily, when a bank fails, the FDIC tries to sell its assets and deposit liabilities -
these transactions are generally referred to as "Purchase and Assumption," or "P & A"
transactions by the FDIC. See, e.g., Purchase and Assumption Agreement, Whole Bank,
Among FDIC, Receiver of Washington Mutual Bank, Henderson, NV, FDIC, and
JPMorgan Chase Bank, N.A. (September 25, 2009), available at
http://www.fdic.gov/about/freedom/Washington_Mutual_P_and_A.pdf. To acquire
deposit liabilities, a buyer needs to have a bank or thrift charter authorizing it to take
deposits. For those deposits to be insured by the FDIC, the buyer either must be itself a
bank or thrift with FDIC insurance or it must apply to the FDIC for deposit insurance. If a
parent company will "control" the bank or thrift taking the deposits, the controlling
company must receive prior approval from the Board of Governors of the Federal
Reserve System (as to a bank) or the Office of Thrift Supervision (as to a thrift). Any
non-company (such as an individual) acquiring "control" of a bank or thrift requires the
prior approval of the primary federal regulator of the bank or thrift.
3. See Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions 74
Fed. Reg. 32932 (July 9, 2009); FDIC Board Approves Proposed Policy Statement on
Qualifications for Failed Bank Acquisitions, PR-112-2009 (July 2, 2009), available at
4. Our previous Memorandum on Private Equity Investments in Troubled Banks is
5. The Director of OTS, along with the Comptroller of the Currency, who directs the
Office of the Comptroller of the Currency ("OCC"), sit on the Board of Directors of the
FDIC alongside the FDIC Chairman, FDIC Vice Chairman, and FDIC Director. See
generally, 12 U.S.C. s. 1812(a).
6. When disposing of assets in a receivership, the FDIC generally is required to: (i)
maximize the net present value obtained in a sale of receivership assets; (ii) minimize
the overall loss the pool of receivership assets experiences; (iii) treat those bidding for
receivership assets fairly; (iv) prevent discrimination against bidders; and (v) maximize
the availability of low/middle income housing. The FDIC also must observe certain
procedural guidelines that seek to minimize the adverse impact the FDIC's actions may
have on individuals or other financial institutions in the community of the failed institution.
12 U.S.C. s. 1821(d)(13)(E). It is interesting to consider whether the Acquisition Policy
Statement has the effect of violating the FDIC's statutory obligation to "ensure adequate
competition and fair and consistent treatment of [bidders]."
See also Section IV.H of this memorandum as to whether certain other aspects of the
Acquisition Policy Statement might be in conflict with existing FDIC policy.
7. Loss sharing is a means for the FDIC essentially to delay payment of the "sweetener"
that induces an acquiring institution to take over the failed institution. Loss sharing has
been structured variously as: (i) a "put" option permitting the acquirer to return riskier
assets to the FDIC within a specified timeframe; and (ii) arrangements whereby the
FDIC absorbs a portion of losses on specified pools of assets. See generally
MANAGING THE CRISIS: THE FDIC AND RTC EXPERIENCE Ch. 7 (FDIC 1997),
available at http://www.fdic.gov/bank/historical/managing/history1-07.pdf.
8. The FDIC is still uncomfortable with PEF bidders, as it continues to express concern
with the "relatively new phenomenon of private capital funds joining together to purchase
the assets and liabilities of failed banks and thrifts where the investors all are less than
24.9 percent owners but supply almost all of the capital to capitalize the new depository
9. CAMELS ratings are the confidential composite ratings given by regulators to a bank
after they have examined the bank's capital, asset quality, management, earnings,
liquidity, and sensitivity to market risk, on a 1 to 5 scale, 1 being highest.
10. See our comment in footnote 13 below regarding the extent to which de novo banks
are subject to more frequent examination than seasoned banks and required to maintain
heightened capital levels.
11. These eight requirements are discussed in greater detail in our earlier memo on
Private Equity Investments in Troubled Banks. See supra note 4.
12. A leverage ratio requires an amount to be held as a simple flat percentage of a
bank's total assets, whereas the common equity ratio is a percentage of risk-based
assets. Requiring a high leverage ratio effectively penalizes banks holding large
amounts of relatively riskless liquid assets, such as cash or Treasuries.
13. The FDIC has recently issued new guidance that extends from three years to seven
years the "de novo period" during which a newly chartered banking institution must
maintain heightened capital levels. See Enhanced Supervisory Procedures for Newly
Insured FDIC- Supervised Institutions FIL-50-2009 (August 28, 2009), available at
14. Tier 1 common equity is Tier 1 capital minus perpetual preferred stock, minority
interests, and certain restricted core capital elements. See 12 C.F.R. s. 325.2(v).
15. The term "well capitalized" is defined at 12 C.F.R. s. 325.103(b)(1) to mean having
(1) a total risk-based capital ratio of ten percent (10%) or more, (2) a Tier 1 risk-based
capital ratio of six percent (6%) or more, (3) a leverage ratio of five percent (5%) or
more, and (4) no capital directive from the regulators. The remaining four capitalization
categories are: adequately capitalized; undercapitalized; significantly undercapitalized;
and critically undercapitalized. 12 U.S.C. s. 1831o(b).
16. 12 U.S.C. s. 1831o(b); 12 C.F.R. s. 325.103. See supra note 4. The Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), Pub. L. No. 102-242, 105
Stat. 2236, mandated that banking regulators take "prompt corrective action" when an
institution's capitalization rating falls below the top two capitalization categories. PCA
may include an increase in the monitoring of the institution, requiring the institution to
raise more capital, requiring the institution to merge with a more highly capitalized
institution, or closure of the institution. The PCA provisions are intended to bring about
the resolution of a depository institution at the lowest possible overall cost to the DIF.
17. The cross-support requirement derives from the FDIC's authority to assess
commonly controlled insured financial institutions for a failure within the group. 12 U.S.C.
s. 1815(c)(5). Such assessments are intended to recover from affiliated institutions the
cost to the DIF of the failure of an affiliated bank. This authority is meant to deter a bank
from shifting assets among affiliates in anticipation of the failure of an institution within a
single group. Ironically, the FDIC's exercise of cross-guaranty authority has in the past
itself caused the failure of banks - e.g., Southeast Bank of West Florida, a sister bank of
Southeast Bank, N.A. (closed on September 19, 1991), was assessed for the failure of
Southeast Bank, N.A., and thereafter failed.
18. The term "extension of credit" is defined as in Federal Reserve Regulation W, 12
19. While affiliate transaction statutes and regulations to which most banks are subject
define the term "affiliate" to mean 25% or more ownership of a class of voting securities,
the Final Policy Statement defines "affiliate" to include any firm in which the investor
directly or indirectly owns 10% of the equity and has maintained that ownership for at
least 30 days.
20. Conventional restrictions on transactions between banks and their affiliates do not
completely prohibit such transactions, but rather limit them, impose special collateral
requirements, and require them to be on non-preferential terms and conditions.
21. The Acquisition Policy Statement defines a "secrecy law jurisdiction" as a "country
that applies a bank secrecy law that limits U.S. bank regulators from determining
compliance with U.S. laws or prevents them from obtaining information on the
competence, experience and financial condition of applicants and related parties, lacks
authorization for exchange of information with U.S. regulatory authorities, does not
provide for a minimum standard of transparency for financial activities, or permits off
shore companies to operate shell companies without substantial activities within the host
22. The carve out of an exception for mutual funds is a clear acknowledgement of the
broad scope of the definition of "private capital investor." The mutual fund carve-out is
available to open-ended investment companies registered under the Investment
Company Act of 1940 that issue redeemable securities that allow investors to redeem on
23. 12 U.S.C. s. 1823(c)(4); 12 C.F.R. 360.1. FDICIA amended the Federal Deposit
Insurance Act ("FDIA"), Pub. L. No. 81- 797, 64 Stat. 873, to require least cost
resolution. The only exception to the "least cost resolution" requirement is where a
systemic risk to the financial system exists. 12 U.S.C. s. 1821(c)(4)(G). Of course, it
would be a stretch for the FDIC to argue that permitting PEF entry into the banking
industry would cause a "systemic risk," and thus that excluding PEFs from bidding on
failed institutions is justifiable regardless of the increased cost to the DIF.
24. Cf. 12 U.S.C. s. 1823(k)(5), which prohibits the FDIC from providing assistance to a
failing depository institution when management of the institution (i) has failed to manage
the institution in compliance with rules and regulations and (ii) has engaged in certain
abusive practices with respect to the institution.
The content of this article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstances.
Mr. Julius Loeser Cadwalader, Wickersham & Taft LLP
One World Financial Center New York NY 10281
Preparing for a major bank shakeout
Rising failures and a weak economic recovery could accelerate a
decades-long trend towards fewer, bigger banks.
By Colin Barr, senior writer
Last Updated: August 28, 2009: 3:45 AM ET
NEW YORK (Fortune) -- The problem bank list is just about the only part of the industry
that's growing right now.
The sector's financial problems, outlined by regulators in excruciating on Thursday, could
speed a shakeout that already has slashed banks' ranks by almost half over two decades.
"We could end up with a couple thousand fewer banks within a few years," said Terry Moore,
managing director of consulting firm Accenture's North American banking practice. "You
could say we're overbanked right now."
The Federal Deposit Insurance Corp. said Thursday that U.S. banks lost $3.7 billion in the
second quarter. Bad loans are growing faster than institutions are setting aside in reserves
for future losses, while total lending has declined for four straight quarters.
The list of troubled institutions -- those deemed to pose at least a "distinct possibility" of
failure -- rose by more than a third during the second quarter, to 416. The FDIC doesn't
reveal the names of banks on the problem list.
Anticipating rising costs of dealing with troubled banks, the FDIC on
Wednesday formalized new rules for private equity firms and other investors buying failed
banks. There has been a heavy trade in failed banks lately, given that 81 institutions have
been closed in 2009 and dozens more are expected to be shut over the next year.
The quick pace of failures has already rewarded some prescient bankers.
"We were preparing for this moment for maybe two and a half years," said Norman C.
Skalicky, CEO of Stearns Bank, a closely held St. Cloud, Minn., institution that has acquired
four banks from the FDIC this year. "The biggest mistake we made was not getting ready a
Bank failures aren't the only driver of consolidation. While bank mergers fell to 89 in the first
half of 2009 from their recent peak of 153 in the first half of 2007, growth-minded banks such
as First Niagara (FNFG) in Lockport, N.Y., are looking for opportunities to expand.
"We are always working with our eyes wide open," said John Koelmel, CEO of First Niagara,
which last month announced the acquisition of Harleysville National (HNBC) of Philadelphia.
"Our shopping cart isn't full."
The shopping spree ahead -- Moore says the U.S. could lose 2,000 banks by the end of
2012 -- is likely to claim some well known regional banks.
Colonial BancGroup of Alabama and Guaranty Financial Group of Texas have failed over the
past month. Chicago condominium lender Corus Bankshares (CORS) has been on death
watch for some time.
Judging by stock prices, investors are still questioning the prospects of KeyCorp
(KEY, Fortune 500) of Cleveland, Marshall & Ilsley (MI) of Milwaukee and Regions Financial
(RF, Fortune 500) of Alabama.
But the bulk of consolidation is likely to come at the expense of smaller banks, whose
numbers have been dwindling for decades in the face of deregulation and technological
advances that disproportionately aided bigger competitors.
The number of banks with less than $100 million in assets has dropped by more than 5,000
since 1992, according to a study released this year by banking consultancy Celent.
Even more pronounced has been the small banks' loss of deposits. Small banks' share of the
U.S. deposit market plunged to 2% last year from almost 13% in 1992, according to Celent
"The world is only getting more complex," Celent analyst Bart Narter wrote, noting ever-
increasing regulatory paperwork and new businesses such as Internet banking. "Small banks
That said, small banks aren't going away. Policymakers such as FDIC chief Sheila Bair have
emphasized their importance in lending to small businesses, and studies have found they
tend to pay better deposit rates than bigger rivals. The FDIC on Wednesday extended
a program that some community bankers credit with helping them to compete with the
And the smallest banks have generally performed better during the financial crisis than their
bigger rivals. Banks with less than $100 million in assets make up more than a third of the
FDIC's problem bank list, but have accounted for just 11 of 81 bank failures so far this year.
Like their bigger rivals, community banks are now enjoying stronger profit margins in the
second quarter, as the spread between the rates banks pay depositors and those they
charge to lend to borrowers widened.
"This is good news for community banks, since three-fourths of their revenues come from net
interest income," Bair said Thursday.
First Published: August 27, 2009: 2:34 PM ET
FDIC soften bank investment restrictions
Wed Aug 26, 2009 7:20pm EDT
Wed, Aug 26 2009
WASHINGTON (Reuters) - U.S. banking regulators partially
retreated from a much-criticized proposal to impose new rules on
private equity investment in troubled banks, aiming to encourage
responsible investment in distressed banks.
The 4-1 vote by the Federal Deposit Insurance Corp board was a partial victory for potential
investors and some regulators who had warned that an initial proposal unveiled in July
threatened to scare away much-needed capital.
The regulators lowered capital requirements and dropped or modified measures that could
have required investors to kick in more capital after their initial investment. The rules will be
further reviewed in six months.
Even so, FDIC Chairman Sheila Bair said the modified rules could depress investor interest
in failed banks, a view shared by a private equity industry group.
"The FDIC recognizes the need for additional capital in the banking system," Bair said, but
added: "We do want people very serious about running banks."
U.S. bank regulators are increasingly looking to nontraditional investors -- such as private
equity groups and international banks -- to nurse failed banks back to health as the number
of insolvent institutions continues to rise, draining the FDIC's deposit insurance fund.
Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three
The Private Equity Council said the rules, at a minimum, would reduce the value of any bids
for failed banks, increasing resolution costs for the FDIC.
"Given the well-documented track record of private equity firms in turning around troubled
companies, it also makes little sense to deprive the banking system of needed expertise,"
the group said.
Josh Lerner, a Harvard Business School professor, said the FDIC was walking a tightrope
given that there was a clear need for outside money due to the number and cost of bank
"At the same time there's clearly a sense of reluctance to give too good a deal to the private
equity guys," he said.
A capital requirement for private equity investments in banks was lowered to a Tier 1
common equity ratio of 10 percent, from the 15 percent Tier 1 leverage ratio previously
One private equity executive said their analysis was that on a typical $10 billion bank, a
private equity bid would be put at around a $1 billion disadvantage because of the 10 percent
The regulators also dropped a requirement that investors serve as a "source of strength" for
the bank they buy, which critics said could have put them on the hook for more capital if the
A cross-guarantee proposal -- meaning if an investor owns more than one bank, the FDIC
can use the assets of the healthier bank to cut losses from the one that has faltered -- was
modified to only include banks that had an 80 percent common ownership.
The FDIC kept a requirement that private equity investors maintain their ownership of a bank
for at least three years, unless they get prior approval by the FDIC.
BankUnited Chief Executive John Kanas said it was clear regulators were holding private
equity to a higher standard than other investors.
"And it will probably result in private equity adjusting their prices downward accordingly for
these transactions," Kanas told Reuters. Earlier this year he led a consortium that included
private equity giants Blackstone Group, Carlyle Group and WL Ross & Co in taking over
failed Florida lender BankUnited.
The dissenting vote was from acting director of the Office of Thrift Supervision, John
Bowman, who said the revised policy was overly broad and imprecise. He also expressed
unease at singling out private equity investors as a separate group.
Voting for the rules were Bair, FDIC Vice Chairman Martin Gruenberg, FDIC Director
Thomas Curry and Comptroller of the Currency John Dugan.
Dugan had raised concerns in July about the initial version of the rules, but said he
supported the new guidelines, describing them as "significantly improved."
The FDIC on Wednesday also voted to extend by six months a program that guarantees
transaction deposit accounts, which businesses typically use to meet payroll and pay
"It has improved overall liquidity throughout the banking system," Bair said.
The agency also said it would seek comment on whether to phase in the impact on capital
requirements of an accounting change that will force banks to bring $1 trillion of off-balance
sheet assets back on their books.
(Reporting by Karey Wutkowski and Steve Eder; Additional reporting by Paritosh Bansal and
Megan in New York; Editing by Tim Dobbyn and Simon Denyer)
FDIC to soften stance, luring private
Paritosh Bansal andMegan Davies
Wed Aug 26, 2009 4:09pm EDT
Wed, Aug 19 2009
NEW YORK (Reuters) - U.S. regulators are likely to back down
from the tough stance they took a month ago on rules for
auctions of troubled banks, which could clear the way for more
private equity bidders to come back into the game.
The Federal Deposit Insurance Corp (FDIC), voting on final guidelines on Wednesday, is still
likely to make it hard for private investors to buy failed banks, but is seen rolling back some
of the most controversial measures following vociferous complaints from the industry.
Regulators are trying to reach a middle ground with the private equity industry because it
represents a crucial source of capital as the United States tries to resuscitate its struggling
"The potential pool, from us and other private equity firms, could be a hundred billion dollars
-- its a huge amount of money that's at stake," billionaire investor Wilbur Ross told Reuters.
He estimates that up to 500 banks could fail between now and the end of 2010.
The biggest complaint from the industry has been that the proposed rules called for a Tier 1
leverage ratio -- the ratio of a bank's capital to its assets -- of 15 percent for three years,
above 5 percent required of well-capitalized banks.
The FDIC may roll that back to 10 percent, two sources familiar with the process said. One of
the sources said there were some questions about whether the level would be a fixed
number or a range of perhaps 8 percent to 10 percent.
The sources declined to be identified because the rules are not public.
Some experts argue that even at 10 percent it will be more expensive for private equity to
buy a failed bank than for a strategic bidder, such as a well-capitalized large bank.
"I don't think an imposition of 10 percent will keep people like us from bidding," BankUnited
Chief Executive John Kanas told Reuters. "But having a higher level of capital like that would
be reflected in our bid."
Kanas led a consortium that included private equity giants Blackstone Group, Carlyle Group
and Ross to take over failed Florida lender BankUnited earlier this year.
Kanas did not expect the FDIC to want to change the terms of the BankUnited deal in light of
the new guidelines, but hold them to the new standard in the future.
The FDIC, led by Chairman Sheila Bair, regulates more than 8,000 banks and insures their
deposits. It has said it needs to issue tough guidelines to ensure that private equity groups
are interested in nursing ailing banks back to health.
"The only way that private equity gets any bank ... is by bidding more than the commercial
banks would bid," said Ross. "There's really no need to have draconian rules when the
process already calls for competitive bids."
Another guideline causing concern among the private equity industry says investors would
be expected to serve as a "source of strength" for the bank they buy, which could put them
on the hook for more capital if the institution struggles.
However, the FDIC may make it such that the holding company can raise capital, so that it
doesn't necessarily have to come from the investors themselves, the first source said.
A cross-guaranty proposal -- meaning if a company owns more than one bank the FDIC can
use the assets of the healthier bank to cut losses from the one that's faltered -- could also be
modified, both sources said.
A guideline, which calls for a minimum holding period of three years for the investments, is
less likely to change, both sources said.
FDIC spokesman Andrew Gray said, "We have taken the feedback of all stakeholders into
account as we have worked to craft a final rule."
Despite a marked pull-back from the FDIC's initial proposals, the new rules will impose a
heavier burden on private equity investors. But they may still find they can achieve high
enough returns to make investments in U.S. banks worthwhile.
Indeed, the threat of tough rules did not stop private equity investors from bidding on FDIC-
An auction for the assets of failed Texas lender Guaranty Financial Group this month drew a
bid from at least one private equity consortium, which included Blackstone, Carlyle and TPG.
A U.S. unit of Spain's BBVA won the auction.
The FDIC is correct in toeing a hard line, said John Chrin, a former JPMorgan Chase & Co
investment banker who is now executive-in-residence at Lehigh University's College of
Business and Economics
"They (FDIC) staked out a position that was probably overly conservative to start. The PE
firms wanted to be where the industry is," said Chrin, referring to the lower capital
requirements for well capitalized banks. "And you wind up settling in between."
(Reporting by Paritosh Bansal and Megan Davies, additional reporting by Karey Wutkowski
in Washington; Editing Bernard Orr)
FDIC may ease private equity buys of failed banks
FDIC may temper proposed restrictions on private equity firms seeking to buy failed
• By Marcy Gordon, AP Business Writer On Thursday August 20, 2009, 3:29 pm
WASHINGTON (AP) -- Federal regulators appear ready to temper proposed restrictions on
private equity firms seeking to buy failed banks, as the government seeks to lure more potential
purchasers amid a mounting tally of collapsed financial institutions.
The Federal Deposit Insurance Corp., which proposed the new policy last month, is expected to
make the changes when its board meets on Aug. 26 and publicly adopts final guidelines, people
familiar with the issue said Thursday.
Private equity firms, which generally buy distressed companies and then resell them after about
three to five years, would face strict capital and disclosure requirements under the FDIC proposal.
Seventy-seven banks already have failed this year amid rising loan defaults spurred by tumbling
home prices and spiking unemployment, costing the deposit insurance fund -- which is financed
by assessments on U.S. banks -- billions of dollars. The FDIC, which seizes the banks and seeks
buyers for their branches, deposits and soured loans, has said the private equity industry can
play a valuable role in injecting sorely needed capital into the banking system.
Still, FDIC Chairman Sheila Bair said the proposed restrictions were intended to provide
"essential safeguards" in light of concerns over private equity firms' ability to apply adequate
capital and management skill to banks they buy. "We are trying to find the best way to have a
balanced approach," Bair said in early July when the policy was opened to public comment.
FDIC spokesman Andrew Gray declined to comment Thursday on what action the agency might
take on the guidelines.
Industry interests say the FDIC proposal tipped the balance in a way that discourages private
equity firms from buying banks. And two of the FDIC board members -- Comptroller of the
Currency John Dugan and John Bowman, acting director of the Office of Thrift Supervision --
warned publicly that it may be overly restrictive.
The regulators "are interested in anything that can help them get rid of failed banks and failed
banks' assets," said Chip MacDonald, an attorney at Jones Day in Atlanta whose clients include
some private equity firms.
But the FDIC policy in its current form "doesn't fly economically" for private equity buyers, he said.
Lawrence Kaplan, a former senior attorney at the Office of Thrift Supervision, said it's an
interesting dilemma for the FDIC. "Chances are they're going to temper that," he said.
The most notable requirement is for private equity investors to maintain a robust amount of cash
in the banks they acquire, keeping them at a minimum 15 percent capital leverage ratio for at
least three years. Most banks have lower leverage ratios -- a key measure of financial strength
that gauges an institution's capital divided by its assets. Banking giant Citigroup Inc., for example,
had a reported ratio of around 9 percent as of June 30.
That mandate could be reduced to 10 percent or lower in the final rules, some people familiar with
the discussions said. Kaplan suggested that instead of a 15 percent minimum, the required ratio
should vary based on an assessment of the risk profile of a particular bank.
Also under the proposed policy, investors would have to own the banks for at least three years
and face limits on their ability to lend to any of the owners' affiliates. That ownership period could
be substantially reduced in the final guidelines, some experts say.
The biggest bank failure so far this year came last Friday, when the FDIC took over Colonial
BancGroup Inc., a big lender in real estate development based in Montgomery, Ala. The agency
sold the bank's $20 billion in deposits, 346 branches in five states and about $22 billion of its
assets to BB&T Corp.
Colonial's failure is expected to cost the deposit insurance fund an estimated $2.8 billion. Colonial
was roughly twice the size of BankUnited FSB, a Florida thrift closed in May with $13 billion in
assets, which was sold for $900 million to a group of private-equity investors-- including the firm
run by billionaire investor Wilbur Ross -- in a rare transaction of that type by the FDIC. The
expected hit to the insurance fund from BankUnited is an estimated $4.9 billion.
FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank
FOR IMMEDIATE RELEASE Media Contact:
July 2, 2009 David Barr (202) 898-6992
The FDIC Board today authorized publication of a Proposed Statement of Policy
on Qualifications for Failed Bank Acquisitions. This proposed policy statement
would provide guidance to private capital investors interested in acquiring or
investing in the assets and liabilities of failed banks or thrifts regarding the terms
and conditions of the investments or acquisitions.
"How investments in insured depository institutions are structured is critical for
the banking system as well as the FDIC," said FDIC Chairman Sheila C. Bair.
"We are particularly concerned with the owners' ability to support depository
institutions with adequate capital and management expertise. This proposed
policy statement is intended to provide those essential safeguards. We are trying
to find the best way to have a balanced approach, and we look forward to
comments that can help us accomplish that."
Recently, private capital investors have indicated interest in purchasing insured
depository institutions in receivership. 1 The FDIC is particularly concerned that
owners of banks and thrifts, whether they are individuals, partnerships, limited
liability companies, or corporations, have the experience, competence, and
willingness to run the bank in a prudent manner, and accept the responsibility to
support their banks when they face difficulties and protect them from insider
The FDIC has reviewed various elements of private capital investment structures
and considers that some of these investment structures raise potential safety and
soundness considerations and risks to the Deposit Insurance Fund (DIF) as well
as important issues with respect to their compliance with the requirements
applied by the FDIC in its decision on the granting of deposit insurance.
Under the proposed policy statement, the FDIC would establish standards for
bidder eligibility in connection with the resolution of failed insured depository
institutions, which provide for:
• capital support of the acquired depository institution;
• agreement to a cross guarantee over substantially commonly owned depository
• limits on transactions with affiliates;
• maintenance of continuity of ownership;
• clear limits on secrecy law jurisdiction vehicles as the channel for investments;
• limitations on whether existing investors in an institution could bid on it if it failed; and
• disclosure commitments.
The FDIC is keenly aware of the need for additional capital in the banking
system, and the contribution that private equity capital could make to meeting
this need provided this contribution is consistent with basic concepts applicable
to the ownership of these institutions that are contained in our banking laws and
regulations, and now summarized in the proposed Policy Statement.
One of the most important safeguard elements in the Proposed Policy Statement
is the requirement that the acquired depository institution be very well capitalized
at a Tier 1 leverage ratio of 15 percent, to be maintained for a period of at least 3
years, and thereafter at a "well capitalized" level.
Safety and soundness considerations may also be satisfied with a lower, but a
still high level, of Tier 1 capital. Accordingly, the FDIC seeks the views of
commenters on the appropriate level of initial capital that will satisfy concerns
relating to both safety and soundness and the economic viability of the terms of
investment in insured depository institutions.
While the issue of capital adequacy is of paramount importance, the FDIC is
seeking comment on all aspects of the proposed policy statement, including nine
specific questions set out in the Notice of Public Comment. Comments are due
30 days from the date of publication in the Federal Register.
Psst! Wanna own a bit of a failed
With bank failures mounting, the FDIC is stuck trying to sell loans, real
estate and more exotic assets like lawnmowers and even a Bentley.
EMAIL | PRINT | SHARE | RSS
By David Ellis, CNNMoney.com staff writer
Last Updated: June 30, 2009: 4:33 PM ET
Where the banks are failing
Bank failures and foreclosures keep mounting
Among the many non-traditional assets
regulators seized when New Frontier Bank
failed was this 2003 Bentley Arnage, which
was sold for $50,000 at an auction held in
Also put up for sale by the FDIC was this
armored truck once owned by the
Bradenton, Fla.-based lender Freedom
Bank, which was shuttered last October.
NEW YORK (CNNMoney.com) -- When New Frontier Bank failed in April, regulators failed to
find a buyer, forcing the FDIC to absorb the roughly $2 billion in assets that were once
owned by the Colorado-based lender.
But what the FDIC may not have anticipated at the time was that the agency would be stuck
with a grab-bag of other exotic assets including a white Bentley Arnage, three lawnmowers,
a Fleetwood Motor home and more than two dozen works of art, most of which reflected the
bank's rural surroundings in northern Colorado.
The demise of New Frontier is just one example of the asset messes regulators are often
stuck with once a bank is shuttered. At an auction held last month, regulators auctioned off a
combined 300 copiers, printers and scanners that were once owned by the California
mortgage lender IndyMac (IDMCQ), which collapsed last July in one of the biggest bank
failures in history.
"It is just a potpourri of stuff," said Chip MacDonald, partner in the capital markets group at
Jones Day, a law firm headquartered in Cleveland.
As of the end of March, the Federal Deposit Insurance Corp. had roughly $16 billion worth of
failed bank assets just waiting to be liquidated, according to an agency report published
earlier this month.
But that number is poised to climb higher as more banks fail. Last Friday, regulators seized
five institutions across the country, the largest one-day instance of failures in years. Experts
widely believe that that hundreds more banks could fail in the years ahead as a result of the
current recession, which means plenty of work for the FDIC.
When a bank fails, the FDIC typically tries to find a buyer for the deposits and branches first
before. If it's unsuccessful, as was the case with New Frontier, the FDIC then looks to sell off
the bank's remaining assets.
Some of that work is handled by the agency itself, but much of it is farmed out to private-
firms that specialize in managing and selling assets.
Regulators have largely looked to two firms - First Financial Network and DebtX - to market
existing bank loans. Next month, Boston-based DebtX will oversee an auction for nearly $67
million in non-performing agriculture, consumer and business loans that were once owned by
Illinois lender Corn Belt Bank and Trust Company, which failed in February.
The agency also recently struck agreements with a trio of auctioneer firms to handle the sale
of everyday items used by the bank, such as computers, desks and other office furnishings,
as well as cars, boats and industrial equipment a bank might have seized from borrowers
that defaulted on their loans.
Helping to manage and sell both commercial and real estate properties for the FDIC is the
Florida-based asset manager Prescient and commercial real estate giant CB Richard Ellis
Group (CBG, Fortune 500) .
Time is money
While regulators can shut down and sell an ailing bank to a healthier institution over the
course of a weekend, winding down an orphan bank can take a bit longer.
For example, regulators have had to cautiously dismantle the Atlanta-based Silverton Bank
after creating a bridge bank to take over the company in early May.
Given the firm's role as a so-called "bankers' bank" providing everyday services to small-
town lenders, it could take a total of five months to wind down the institution, MacDonald
said, referring to the situation as "a mess."
Timing, however, can be everything when a bank fails, especially as regulators scramble to
squeeze every dime out of a failed bank's remaining assets.
Consider the case of Downey Financial (DWNFQ). Last fall, just two months before
regulators seized the California-based lender, the company was shopping its twin-towered,
six-story headquarters in Newport Beach for a reported $115 million.
The nearly 43,000-square-foot piece of property is still up for grabs, albeit at a deep
discount. Prescient is currently asking for $59 million for the property, according to its Web
Bliss Morris, president and CEO of First Financial Network, a 20-year-old Oklahoma-City-
based firm, said the same holds true in trying to sell loans on behalf of the FDIC -- the longer
it takes to make a sale, the more likely it is that the loans will lose even more of their value.
Hoping to avoid some of those headaches, regulators have tried to forge loss-sharing
arrangements with acquiring banks. Under such an arrangement, buyers agree to take on
some of the bad assets in exchange for having the FDIC absorb some losses -- typically over
the next five to 10 years.
Regulators brokered such a deal with a consortium of private equity firms in May before
authorities shuttered the Florida lender BankUnited FSB.
"The agency works very hard to sell as many assets they can with the deposit franchise,"
said Robert Hartheimer, a Washington, D.C.-based consultant and adviser to Promontory
Financial Group, who once served as director of the FDIC division charged with overseeing
Competing with the vultures
Even as such moves may soften the blow to the FDIC's deposit insurance fund, it is clear
that the agency needs to get the maximum possible value it can from failed bank assets.
In the first quarter, the value of the deposit insurance fund fell by $4.3 billion, or nearly a
quarter of its value, to just over $13 billion.
Luckily, the demand for failed bank assets have been robust by all accounts.
Auctions of the more mundane items like office furniture have attracted everyone from fellow
bankers to a school administrator in Atlanta who was looking to add new desks for her
growing student population.
"Everything we have attempted to sell has been sold," said Rick Levin, president of the
Chicago-based firm Rick Levin & Associates, one of the auction firms assisting the FDIC with
its asset sales. "We are finding strong demand."
And while the bidding for real estate and loans sales has been dominated by institutional
investors so far, there are indications that average Joes are also starting to express interest
in scooping up toxic assets.
Bill Bartmann, a former distressed bank debt investor who recently published a book entitled
"Bailout Riches" aimed at teaching people how to profit from buying bad loans on the cheap,
notes several of his students have invested as little as $5,000 in loans once owned by failed
While such investments come with plenty of risk, it stands to reason that individual investors
could generate similar returns to "vulture investors" who are gambling millions of dollars on
the possibility that there is still some value in those loans.
"It doesn't always take a Morgan Stanley or Goldman Sachs to come to the table," he said.
"This really is an opportunity."
First Published: June 30, 2009: 3:53 PM ET
Treasury’s Got Bill Gross on Speed Dial
By DEVIN LEONARD
Published: June 20, 2009
Newport Beach, Calif.
Stephanie Diani for The New York Times
Appearing on TV and bending the ear of the White House, Bill Gross of Pimco has emerged as one of the nation's
most influential financiers.
Times Topics: William H. Gross
Timothy F. Geithner, the treasury secretary, wants investors like Pimco to work with the government to buy some
Every day, Bill Gross, the world’s most successful bond fund manager, withdraws
into a conference room at lunchtime with his lieutenants to discuss his firm’s
investments. The blinds are drawn to keep out the sunshine, and he forbids any
fiddling with Blackberry’s or cell phones. He wants everyone disconnected from the
outside world and focused on what matters most to him: mining riches for his clients
at Pimco, the swiftly growing money management firm.
Mr. Gross, 65, has long been celebrated for his eccentricities. He learned some of his
lucrative investing strategies by gambling in Las Vegas. Many of his most inspired
ideas arrived while he was standing on his head doing yoga. He knows he has to be
well dressed for client meetings or television — but instead of keeping his Hermès
ties neatly knotted, he drapes them around his neck like scarves so he can labor with
his collar open.
And with the collapse of Wall Street, Mr. Gross has emerged as one of the nation’s
most influential financiers. His frequent appearances on CNBC draw buzz, as do his
wickedly humorous monthly investing columns on the Pimco Web
site. Treasury secretaries call him for advice.Warren E. Buffett, the Berkshire
Hathaway chairman, and Alan, the former Federal Reserve chairman, sing his
“He’s a very individualistic person. He doesn’t come at analysis or investment
judgment in the words, terminology or ambience that I have been used to over the
decades,” Mr. Greenspan says. “That may be the secret of his success. There is no
doubt there is an extraordinary intellect there.” Mr. Greenspan, it should be noted,
now works for Pimco as a consultant.
Amid all of this, Mr. Gross and his firm are trying to shape the government’s
response to the economic crisis. He is one of the most fervent supporters of the
Obama administration’s plan to enlist private investors to help bail out the nation’s
ailing banks and try to revive the economy.
That effort, known as the Public-Private Investment Program, or P.P.I.P., has gained
little traction so far. But Mr. Gross has energetically defended its architect, Treasury
Secretary Timothy, against critics like the New York University economics professor
Nouriel Roubini and the New York Times columnist Paul Krugman — both of whom
argue that the strategy is flawed and that it would be best for the government to
temporarily nationalize so-called zombie banks to prevent a repeat of the Great
Such nationalization, Mr. Gross insists, would be an unmitigated disaster. “There are
two grand plans,” he said this spring at a meeting of his firm’s investment
committee. “One is the Krugman-Roubini plan. They think the banks have so much
garbage they are beyond hope. The other side is the administration’s side. That’s the
one we’re on. If the other side should ever gain credence, then we’ll have something
to worry about.”
Mr. Gross is hardly a disinterested observer. Pimco, owned by the German
insurer Allianz, is jockeying to be picked by Mr. Geithner to relieve the likes of Bank
of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage
debt so they can start lending freely again. Mr. Gross calls the plan a “win-win-win”
for the banks, taxpayers and Pimco investors.
The government is planning to announce soon which money managers will
participate. A spokesman for the Treasury Department would not say whether Pimco
would be one of them.
IN many ways, it is perfectly logical for the White House to turn to someone like Mr.
Gross at such a time. Few investors understand the mortgage market better. As co-
chief investment officer, he personally manages Pimco’s flagship, the Total Return
fund, which has $158 billion in assets. As of the end of May, he had invested 61
percent of the fund’s money in mortgage bonds.
Mr. Gross has always been partial to mortgage bonds. And why not? He has done
fabulously well with them. In an October 2005 letter to investors, he made one of the
most prescient calls of the last decade, warning of the looming subprime mortgage
crisis. Almost everybody ignored him. Today, they wish they hadn’t.
When the housing bubble burst and the financial markets fell apart, investors lost
billions of dollars. Not Mr. Gross’s clients. Class A shares of the Total Return fund,
for individual investors, were up 4.3 percent in 2008, or nine percentage points
ahead of comparable bond funds, according to Morningstar; this year through
Thursday, the shares were up 5.4 percent.
In the midst of an economic crisis, those numbers are impressive. So is the longer-
term record: In the 10 years through Thursday, the fund had an annualized return of
6.42 percent, beating its benchmark by 0.54 percentage points, according to
That’s one of the reasons the government has courted him closely. Last fall,
the Federal Reserve Bank of New York, run at the time by Mr. Geithner, hired Pimco
— along with BlackRock, Goldman Sachs and Wellington Management — to buy up
to $1.25 trillion in mortgage bonds in an effort to keep interest rates from
Last December, when it was pressing Bank of America to complete its ill-fated
acquisition of Merrill Lynch, the Federal Reserve also looked to Pimco for advice.
According to recently released messages that Fed staff members sent one another
that month, Pimco evaluated the two banks and concluded that Merrill wouldn’t
survive without a capital infusion or additional government aid.
Today, Mr. Gross is eager to buy the same subprime loans he once refused to touch,
as part of the Treasury’s distressed-asset initiative. After all, the thinking goes, if
anybody can figure out how much all this debt is worth, it’s Pimco. But Pimco’s
involvement in so many aspects of the bailout has made many other financiers and
analysts uncomfortable. They say its proximity to the Treasury Department and the
Fed may allow it to reap billions of easy dollars through federal contracts and
preferential investment opportunities.
A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy
mortgage securities on its behalf, when the firm is already a huge buyer and seller of
the same bonds? “That’s the equivalent of a no-bid contract in Iraq,” fumes Barry
Ritholtz, who runs an equity research firm in New York and writes The Big Picture, a
popular and well-regarded economics blog. “It’s a license to steal.”
(Page 2 of 6)
No one, of course, has actually accused Pimco of theft. But there is a larger question:
Whose interests is the firm looking out for in the bailout? Money managers, after all,
have a legal obligation — a fiduciary responsibility — to put the interest of their
investors before anyone else. Even Mr. Gross acknowledges that Pimco’s interests
won’t always be aligned with those of the government.
Chip Somodevilla/Getty Images
Warren E. Buffett, right, wrote to Henry M. Paulson Jr. last year to say Pimco should be in charge of any effort to
buy the securities that were drowning Wall Street.
Times Topics: William H. Gross
Mohamed el-Erian, C.E.O. of Pimco, didn't initially get much traction with his plan for a public-private partnership to
buy distressed debt, but the Treasury later unveiled a similar proposal.
Mr. Gross points out that he has never even met Mr. Geithner. For its part, the
Treasury Department plays down Pimco’s influence. “We speak with a number of
market participants and believe seeking out a diversity of perspectives is critical to
our efforts,” says Andrew Williams, a spokesman for the department. He says the
Treasury takes conflicts of interests “very seriously in all cases.”
Mr. Gross is well aware of the criticism that has been directed at Pimco. During an
interview at its headquarters in Newport Beach, Calif., sitting at his horseshoe-
shaped desk on its 4,200-square-foot trading floor overlooking the Pacific Ocean, he
brings up the topic of perceived conflicts of interest himself.
He almost never personally buys and sells bonds. Pimco has dozens of traders who
do this for him here. “There’s the mortgage desk over there,” he says, pointing to a
group of well-scrubbed young people hunched over computers. “We’ve been buying
some mortgages this morning. That’s our baby, so to speak. That’s our bag.”
He immediately adds that this mortgage trading operation is completely separate
from the one on the floor below, where traders are working on behalf of the Fed. He
says he can’t even visit that floor himself anymore without a company lawyer at his
side. The last time he did was in December, when he wished the traders happy
“I said, ‘Merry Christmas,’ ” Mr. Gross recalls. “The lawyer said, ‘Mr. Gross says
Merry Christmas.’ Right then and there, I knew that communications were basically
severed. That’s the way the Fed wants it.”
He says he assumes that Pimco traders working on behalf of the government don’t
talk to their peers trading for Pimco’s own accounts. Then again, he said he doesn’t
know for sure what happens after hours.
“I don’t drink beer with these guys; I have no idea what happens in the privacy of
their own homes,” he says. He says that when he encounters traders working for the
Fed outside the office, he doesn’t talk to them.
“I pass some of them on the way to the lunch shop,” he says. “I just sort of wave. I
don’t know what to do.”
MR. GROSS is fond of saying he is the antithesis of a Wall Street “alpha male.” He is
every bit the Southern Californian, with longish hair and a laid-back attitude. Most
Wall Street executives won’t talk to a reporter without a public relations person
hovering nearby. Even then, they can be disappointingly bland. No one would ever
say such a thing about Mr. Gross. He approaches an interview is almost like a
therapy session; it is a chance for him to make confessions.
“I’ll tell you an interesting story,” he says at one point. “I shouldn’t, but I will. It’s like
I’m taking truth serum every time I do this.”
The tale is about “a very childish and immature” e-mail message that he sent Don
Phillips, a managing director of Morningstar, the mutual fund research company,
when Morningstar didn’t select him as its fixed-income fund manager of the year in
2008. It is an intriguing story. But it’s nowhere near as interesting as what he has to
say about Pimco’s role in the bailout.
He sounds genuinely pained by the economic collapse. “There was always a big part of
me that thought the Depression was just something from my old American Heritage
history books,” he says. “I thought: ‘This stuff can’t happen really. I mean, this is just for
the economic philosophers and the paranoid worriers.’ Then, in the last 6 to 12 months,
you go, ‘God, this just might happen!’ ”
Published: June 20, 2009
(Page 3 of 6)
With the fate of the largest banks still uncertain, a heated debate continues about
how to fix the problem. Mr. Geithner wants to enlist money managers like Pimco to
buy distressed bank assets with financial backing from the government. That way,
his supporters argue, they can offer such generous prices that banks can disgorge the
assets without too painful a hit.
Times Topics: William H. Gross
But proponents of bank nationalization say the Treasury’s plan won’t work because
some banks can’t afford to take any losses on asset sales. This camp believes
nationalization is the best path because it will let the government clean up banks’
balance sheets and restore their health.
Mr. Gross argues that this would completely destabilize the financial markets. “If you
thought Lehman Brothers was a mistake, just stand by and see what nationalizing
Citi or B.of A. would do,” he argued in one of his monthly letters to Pimco investors.
His mood brightens when he talks about how much money Pimco could reap by
participating in the Geithner plan. No wonder: the terms are deliciously favorable for
participants selected as fund managers. Money managers like Pimco would be
expected to raise at least $500 million from their clients. The Treasury would match
that with taxpayer dollars. Then Pimco and the Treasury would create a jointly
owned fund of at least $1 billion that would buy distressed mortgage bonds.
Government largess doesn’t stop there. The fund will be eligible for low-interest
financing from both the Treasury and the Fed that analysts at Credit Suisse First
Boston estimate could be as high as four times the total equity in the fund. So if
Pimco ponied up $500 million, the fund that it manages could borrow $4 billion.
Pimco would then negotiate with banks to buy their wobbly mortgage-backed
securities. Mr. Gross says that some of these securities pay an interest rate as high as
14 percent and that even if default rates were 70 percent, Pimco and the government
would still make a 5 percent return after covering their negligible borrowing costs.
That means the government-Pimco partnership could make at least $250 million in a
year on a $5 billion investment fund. Of that amount, Pimco would get $125 million
— a 25 percent return on its original investment.
But here’s the part that makes Mr. Gross salivate. If things go badly, the government
is responsible for repaying all that debt. “It’s just like in blackjack,” he says. “That
puts the odds in your favor. If you don’t bet too much and if you stay at the table long
enough, the odds are high that you are going to go home with some extra money in
Indeed, for all of Mr. Gross’s anguished talk about the crisis, there’s no escaping the
fact that Pimco isn’t exactly suffering. In November, the Total Return fund became
the world’s largest mutual fund with $128.4 billion in assets, according to
Morningstar. Since then, its assets under management have climbed to $158 billion.
The firm once had trouble luring prospective employees to Newport Beach. Now
Pimco is being deluged with résumés.
Meanwhile, some of the most powerful people in the nation call Mr. Gross for advice.
“Paulson will call, Geithner will call, and I’ll be like, ‘Yabba-dabba’ or ‘Blah-blah-
blah,’ ” he says with a measure of self-deprecation — and an equal dose of pride. “I
turn into a walking, talking idiot.”
Mr. Gross has been through crises before. He nearly died — and briefly lost part of
his scalp — in 1966 when he crashed his car while making a doughnut run for his
fraternity brothers at Duke University. He spent much of his senior year recovering
in the hospital. He also became obsessed with blackjack after reading “Beat the
Dealer: A Winning Strategy for the Game of Twenty-One,” by Edward O. Thorp,
an M.I.T. mathematics professor (who is now a very successful hedge fund manager).
After he got his diploma, Mr. Gross hopped a freight train to Las Vegas with $200
sewed into his pant leg. He played blackjack for 16 hours a day. “After a while it gets
pretty boring and pretty stinky,” he recalls. “People lose money. They don’t win it.
You’re just watching the dealers.”
Even so, in four months, he turned $200 into $10,000 and used his winnings to pay
for his studies toward an M.B.A. at the University of California, Los Angeles. He
thought he could apply the lessons learned at the blackjack table to the stock market.
After getting the degree, he called all the big Wall Street brokerage firms. Nobody
called him back.
FINALLY, his mother showed him a classified ad for a junior credit analyst in the
bond department at the Pacific Investment Management Company, a subsidiary of
Pacific Mutual Life.
Published: June 20, 2009
(Page 4 of 6)
Although Mr. Gross had no interest in bonds, he took the job as a steppingstone to
stock-picking. Back then, the bond market was a sleepy corner of the financial world.
Mr. Gross’s job was to make sure that Pimco avoided buying bonds from companies
that might go belly-up and burn their creditors.
Times Topics: William H. Gross
By the mid-1970s, the market had become sexier as shrewd investors like Mr. Gross
began trading bonds likes tocks — and began earning outsize profits.
In short order, Mr. Gross also dived into the first mortgage-backed securities (which
carried comfy government guarantees) and began studiously monitoring interest
rates so he could place bets on his own macroeconomic predictions. This was highly
unusual for a bond fund manager — and still is.
“There are a lot of big bond shops that frankly don’t feel confident doing this,” says
Lawrence Jones, a Morningstar analyst. “It’s not part of their tool kit.”
Mr. Gross played well on television. In 1983, he became a regular on “Wall Street
Week” on PBS; he loved the attention, and his ubiquity gave Pimco a big boost. Four
years later, Pimco rolled out the Total Return fund. Over the next 10 years, its assets
soared to $24 billion from $165 million. Much of this was because of shrewd
investing. But TV did wonders, too. “It doesn’t do you any good to be good if nobody
knows about you,” Mr. Gross says.
In 1999, he warned in his monthly investment column that the dot-com bubble
would soon burst. The next year, it did. Despite the market downdraft, Mr. Gross’s
fund ended 2000 up 12 percent, and that same year he and his partners sold Pimco
to Allianz for $3.3 billion. Mr. Gross received $233 million for his stake, and Allianz
also agreed to pay him $40 million in retention bonuses and seems to be giving him
Not that Mr. Gross was going anywhere.
FREE from distraction in a gym across the street from his offices, Mr. Gross happily
rides a stationary bike, followed by a half-hour of yoga. Toward the end of his
routine, he stands on his head for a few minutes in a position called the Feathered
Peacock. He wobbles so much that you expect him to lose his balance and fall over,
but he says some of his best ideas have come to him while he was upside down.
One of those insights came in 2005, when — while standing on his head — he began
to worry about the real estate bubble.
He’d watched the prices of homes climb into the stratosphere in Southern California,
and he says he felt as if he were witnessing something out of “Alice in Wonderland.”
Was this happening all around the country?
Pimco dispatched 11 mortgage analysts to 20 cities to find out. They posed as
prospective homebuyers and drove around with unsuspecting real estate agents and
mortgage brokers who told them how easily they could get a home loan. “It was a
little deceptive,” Mr. Gross says. “I didn’t feel good about that, but I didn’t know how
else to get the real information.”
Mr. Gross says he thought it was obvious what was driving this madness: subprime
mortgages. He was certain that the real estate market would collapse and take the
economy down with it, and he made those thoughts known in letters to his investors.
Pimco steered clear of risky housing debt, which meant that, for a time, some of his
competitors who stockpiled the briefly lucrative products outperformed him.
For a fiercely competitive man, it was an awkward time. “Bill takes it hard when the
numbers aren’t what he thinks they should be,” his wife, Sue, confided by e-mail. “In
2006, he recommended a Pimco bond fund to the owner of a local doughnut shop,
and when it didn’t do well for a while, he could hardly go in the shop for his favorite
coconut cake doughnut.”
Fortunately for Mr. Gross, but not for the economy, this couldn’t last forever. The
housing bubble finally burst in 2007, and the crisis followed. He was vindicated. Yet
this was only part of the reason for his success. He also predicted in one of his
monthly columns that the government would have to pump billions of dollars into
the economy to avert a total collapse. At the same time, he and his Pimco team came
up with an audacious plan: invest in bond sectors that Washington would be forced
to support — like government-backed mortgages guaranteed by Fannie
Mae and Freddie Mac.
Mr. Gross whimsically calls this strategy “shake hands with the government.” And he
used his access to the news media to get the government’s attention. In a CNBC
interview on Aug. 20, 2008, he argued that Americans were putting “their money in
the mattress” because the government hadn’t rescued imperiled financial institutions
like Fannie and Freddie.
On Sept. 7, Henry M. Paulson Jr., then the Treasury secretary, announced that the
government was taking over Fannie and Freddie. The value of the Total Return fund
rose by $1.7 billion in a single day.
Published: June 20, 2009
(Page 5 of 6)
Michele Davis, Mr. Paulson’s former spokeswoman, says Mr. Gross’s TV appearances
had nothing to do with the decision: “There are $5.4 trillion of Fannie and Freddie
securities around the world. Investors here and across the globe were worried and
voicing the same concerns.”
Times Topics: William H. Gross
But some of Pimco’s critics aren’t convinced. “The Treasury Department watches
CNBC all day,” says Steven Eisman, a portfolio manager and banking expert at
FrontPoint Partners, an investment firm. “I know that for a fact. He was putting
pressure on them.”
Mr. Gross says nothing could have been further from his mind. He says he goes on
TV with “a disbelief that people will believe or act on what I say,” adding that “people
should think independently.”
At the same time, Pimco tried to influence the direction of the bailout itself. In the
spring of 2008, Pimco’s chief executive, Mohamed A. el-Erian, a former policy expert
at the International, floated a plan in Washington for a public-private partnership
similar to the P.P.I.P. plan that Mr. Geithner later unveiled. It didn’t get much
But then Lehman Brothers collapsed on Sept. 15. Mr. Paulson asked Congress to pass
the Troubled Asset Relief Plan, better known as TARP, which would enable the
government to spend $700 billion to buy mortgage securities from teetering banks.
The Treasury turned to Pimco and others for help.
“When we first asked for the TARP legislation in September, we were looking at
purchasing assets,” says Ms. Davis, the former Treasury spokeswoman. “We
definitely talked to Pimco and a lot of other asset managers. You had to find out how
such a program might work and bounce ideas around to see how this thing would
In the midst of the crisis, in October, Mr. Gross’s friend, Mr. Buffett, wrote to Mr.
Paulson suggesting a plan similar to the one Mr. Erian had been pushing. However,
Mr. Buffett says he came up with his idea independently.
“I called Bill Gross and Mohamed and said: ‘I’ve got this idea. If it goes forward, I
hope you guys would manage it and would do it on a pro bono basis,’ ” Mr. Buffett
recalled in an interview. “Within an hour, they said they were on board and they were
willing to do whatever was called for.”
Mr. Gross publicly announced that his firm would do the job free. “I got call after
call, e-mail after e-mail saying what Bill offered was right for the country and that he
was a great American,” says a Pimco spokesman, Mark J. Porterfield. At first, it
looked as if the Treasury might take Mr. Gross up on the offer. But his hopes were
temporarily dashed when the Treasury simply gave TARP funds to the banks instead
of purchasing bad assets.
And at the same time, people began to wonder about Mr. Gross’s motives. He made it
clear that he was not afraid to put Pimco’s interests ahead of the government’s in the
bailout. As part of its “shake hands with the government” strategy, Pimco had bet
that the Bush administration would come to the rescue of the nation’s banks and
other financial institutions. So it bought a variety of those bonds, including those
of GMAC, the financial division of General Motors.
In November, as the economy continued to weaken, GMAC asked the Fed for
permission to become a bank holding company so it could receive TARP financing.
The central bank granted GMAC’s wish, with one caveat: GMAC had to swap 75
percent of its debt for equity, allowing GMAC to potentially buy back a big chunk of
its bonds for just 60 cents on the dollar.
Mr. Gross balked at the arrangement because, as a GMAC bondholder, he would
have been forced to take a big financial haircut. “We said: ‘It doesn’t look too good to
us. We think we’ll just hold onto the existing bonds,’ ” he remembered. Much to the
amazement of many people on Wall Street, the Federal Reserve, which declined to
comment, still allowed GMAC to become a bank holding company and the
government later guaranteed all of its debt, meaning that Mr. Gross’s GMAC bonds
would be worth 100 cents on the dollar when they mature.
Mr. Gross is unapologetic about the outcome. “The government has a vested interest,
and it’s not necessarily aligned with Pimco’s interest,” he says.
SIMON JOHNSON, a former chief economist for the International Monetary Fund
and now a professor at the Sloan School of Management at M.I.T., says he isn’t
surprised that Mr. Gross is such a virulent foe of nationalization. As Professor
Johnson points out, Pimco is a major bondholder in some of the biggest banks.
Nationalization would hurt his portfolio.
(Page 6 of 6)
“It would reduce the present value of his holding,” says Professor Johnson, himself a
proponent of nationalization. “Therefore, he is not going to look good as an
Times Topics: William H. Gross
What of Mr. Gross’s predictions that nationalization would deepen the recession?
Professor Johnson acknowledges that there are risks either way, but says he thinks
that people should be skeptical when powerful financiers make doomsday
“I think we pay undue deference to people who are very rich and have been
successful in the financial sector in this country,” he says. “We think they are the
gurus who think they have unique expertise, and if Bill Gross tells us there will be a
panic, it must be true. Well, no, I don’t believe it. These guys all say this kind of
The twist, of course, is that the Obama administration has embraced the same
public-private partnership proposal that Pimco has been pushing along and that Mr.
Paulson briefly considered last fall. Mr. Gross says that the Geithner plan is better
because the government provides such generous debt financing.
Pimco is proud of its partnership with the government. Mr. Erian points out that the
firm’s executives have been members of the Treasury Department’s Borrowing
Advisory Committee (along with many other Wall Street executives) for years. Its
current representative, the Pimco managing director Paul McCulley, says part of his
job is to ingratiate himself with officials at the Treasury and the Federal Reserve so
Pimco can better understand impending policy decisions. He boasts that he is on a
“first-name basis” with both Mr. Geithner and the Fed chairman, Ben S. Bernanke.
“We have a whole lot bigger profile now than we did years ago, but the fact of the
matter is we’ve been doing the same thing in the last year that we’ve been doing for
the last 10 years,” Mr. McCulley says. “I’d like to think we’re having some influence
in the public policy arena. And I say that first and foremost as a citizen.”
Citizen — but also investor. And some critics of the financial benefits that Pimco
might snare if the P.P.I.P. gets rolling are quick to point out what Pimco stands to
“The critics would argue that all the benefits go to Pimco,” says Representative Scott
Garrett, Republican of New Jersey, who is a member of the House Financial Services
Committee and a skeptic of the Geithner plan. “Well, maybe not all the benefits. But
they get the best ones right out the door. And the taxpayers are on the hook.”
The Obama administration says it will soon select lead fund managers for P.P.I.P. It’s
almost certain that Pimco will be among them. “If you are trying to encourage
investment from the private sector, isn’t it only logical to involve the most successful
asset management organizations in the private sector?” says Thomas C. Priore, chief
of ICP Capital, a boutique fixed-income investment bank.
And being selected by the government has other benefits, Mr. Priore adds. “If any
endowment or public pension plan representative is looking for an asset
management firm, he or she won’t get fired for hiring Pimco because, well, the
government hired Pimco,” he says. “That certainly enhances your franchise value.”
P.P.I.P.’s fate remains uncertain. When the Treasury Department put 19 of the
nation’s largest banks through a stress test, many passed the exam and their stocks
prices rose. They have raised $50 billion in new capital. Now some of them are likely
to hold on to their distressed mortgage securities in the hope that the housing market
recovers — rather than face the pain of selling the assets at a loss now (a situation
that may get dicey if housing doesn’t, in fact, recover).
The Treasury now says that Mr. Geithner expects P.P.I.P. to serve as “backstop” for
banks that find themselves in a pinch.
There’s a darker scenario, possibly. If mortgage default rates do soar, some big banks
may fail. Then the administration would have to seriously consider nationalization,
which might devastate Mr. Gross’s holdings. He is, of course, well of aware of this
possibility and says he’s watching Mr. Geithner as closely as he watched the
blackjack dealers in Las Vegas.
“We just don’t want to flush it all down the drain,” he says. “You want to shake hands
with the government. But maybe it shouldn’t be a super-firm handshake.”
AT a lunchtime meeting this past spring at Pimco, executives tell Mr. Gross that
they’re worried about the fallout the firm will face if it receives a financial windfall as
part of P.P.I.P.
“The risk is that you have a Congress with a populist bug,” Mr. McCulley says.
Dan Ivascyn, another of the firm’s managing directors, agrees. “I think there is a risk
that we’re going to get criticized,” he says. “I think Pimco could get roughed up.”
“I think there is a much bigger chance of us getting roughed up personally,” says
Scott Simon, head of Pimco’s mortgage-backed securities team.
Finally, Mr. Gross weighs in.
“So what are you saying?” he asks. “If we fail, we’ll get the shaft, and if we succeed,
we’ll get the shaft?”
Banking on opportunity
By Steven Syre
Globe Columnist / May 8, 2009 Boston Globe
Apparently, retirement didn't agree with Bob Mahoney, the longtime Boston banker
and former Citizens Financial Group vice chairman.
Mahoney is back in the banking business, sort of, and even working in the same State
Street tower where he kept his Citizens office for so many years. But these days he
isn't interested in working for banks. He's trying to buy them.
Yes, you read that correctly. At a time when investors are focused on bank stress tests
and worried about growing levels of bad loans, Mahoney has commitments from big-
money investors for about $800 million, said four people familiar with the venture.
That might be enough capital to help him acquire banks with assets approaching $10
The idea of buying existing banks or starting new institutions in this environment
isn't as crazy as it might sound. I've talked recently to several investors, unrelated to
the Mahoney venture, who have considered starting banks on a much smaller scale.
The basic premise: There is a lot of banking business available, and healthy
institutions with enough capital can clean up. Many businesses looking for financing
are running into a very real credit crunch, and three big banks in the Greater Boston
market - Bank of America, Citizens, and Sovereign Bancorp - are struggling with
their own problems. Many investors see a market opportunity, despite the obvious
risk of lending money in a severe recession.
Another angle: Some investors who believe the economy is stabilizing see bank
stocks as a potential opportunity soon, as risk slowly starts to recede and share prices
remain relatively depressed. Access to very inexpensive money, thanks to ultralow
short-term interest rates engineered by the Federal Reserve, will turbo charge the
profitability of healthier banks at some point. The leading index of big US bank
stocks has doubled since it hit rock bottom in March.
Mahoney spent most of his career at Citizens and earlier at Bank of Boston as a
commercial banker, lending to business clients. Christopher Downs, formerly a
group executive vice president for consumer lending services at Citizens, has joined
Mahoney in the new venture.
So who are the investors backing the Mahoney venture? Thomas H. Lee Partners, the
Boston private equity firm, is involved, along with other local investors. Some New
York investors, including billionaire George Soros, are also believed to be helping to
finance the venture.
Executives at Thomas H. Lee declined to comment, and a call to Soros's office was
Mahoney, 60, last appeared in this space nearly a year ago as he was about to retire
at Citizens, one of the last to leave among the senior executives who helped former
chief executive Larry Fish build the company into a New England banking giant. He
returned a call yesterday but declined to answer any of my questions about his new
In his years at Citizens, Mahoney was deeply involved in the company's banking roll-
up strategy. Citizens bought a long line of smaller banking companies in New
England and beyond, integrating them into a growing banking organization. His new
plans sound like a small version of the same strategy.
Mahoney is not the first former Citizens executive to try to buy banking businesses
on his own. Steve Steinour, who eventually became the president of Citizens, left the
company in 2008 and joined CrossHarbor Capital Partners in Boston last year.
Steinour, who had extensive experience managing troubled bank assets years earlier,
sought to buy from sellers in distress. Instead, he ended up running one of the
nation's hardest-hit regional banks in the current recession, taking over as chief
executive of Huntington Bancshares Inc. in Columbus, Ohio, in February. At a recent
brokerage conference for bank stock investors, Steinour expressed interest in buying
I doubt Mahoney has any such interest in distressed banks and their troubled
balance sheets. The opportunity to build a large community-based bank by acquiring
healthy smaller institutions, especially while so many big rivals remain hobbled, is an
interesting idea that could attract lots of business.
The trick, as always, is to find other bankers who are willing to sell at an affordable
price. Citizens often succeeded in buying banks by paying top dollar. That's a luxury
Bob Mahoney, or any other buyer, may find hard to afford today.
Steven Syre is a Globe columnist. He can be reached at firstname.lastname@example.org.
Planning and Executing a Successful Troubled Bank Acquisition
By Greyson E. Tuck, Gerrish McCreary Smith Western Independent Bankers
The current banking environment is tough for community banks. An increase in
regulatory scrutiny and an economy in recession have combined to increase bank
failures and problem banks across the board. Unfortunately, it appears the
government has taken a “too big to fail” and “too small to matter” approach to the
situation. This approach has led to a number of community banks whose best (or, in
some instances, only) option is to market themselves for sale as a “troubled
The proliferation of community banks marketing themselves as troubled institutions
has resulted in acquisition opportunities for healthy institutions that were previously
unavailable. These troubled institutions have also created a whole new set of
decisions to be made by a healthy institution’s board of directors as they enter the
merger and acquisition arena.
A troubled bank acquisition can prove to be a profitable strategic move if the
acquiring institution properly plans for and executes the acquisition. For those that
do not, the results can be disastrous. The following are five principles a board should
follow in planning for and executing a successful troubled bank acquisition.
Decide Whether the Bank Will Pursue a Troubled Bank Acquisition before
the Opportunity Presents Itself
The first decision to be made regarding the acquisition of a troubled institution is
whether the acquisition fits within the bank’s long-term strategic plan. Some banks’
strategic plans are conducive to acquisitions while, for others, an acquisition of a
troubled bank does not make sense no matter what the situation or how “cheap” it
may seem initially. A board of directors should decide whether a troubled bank
acquisition fits within the bank’s long term strategic plan long before an opportunity
to make a troubled bank acquisition presents itself. Making this decision early allows
the board to fully understand, debate and plan for the issues associated with a
troubled bank acquisition. More importantly, it allows a board the benefit of being
free from the pressure of time constraints under which troubled institutions normally
In addition to determining whether a troubled bank acquisition fits within the bank’s
long-term strategic plan, a board should consider whether its “appetite for risk” is
conducive to a successful troubled bank acquisition. Some boards, no matter what
the terms of the deal or condition of the target, simply do not have the appetite for
risk necessary to complete a troubled bank acquisition. The board should determine
whether it has the ability to withstand the ups and downs and the uncertainty of a
troubled bank acquisition.
Identify the Ideal Target Institution
If a board of directors has decided acquiring a troubled financial institution fits within
the bank’s long-term strategic plan, the board should next identify the bank’s “ideal”
target. Identifying an ideal target does not mean pinpointing a specific institution
and waiting for it to become a troubled acquisition candidate. Instead, identifying the
ideal target institution requires a board to identify the general attributes of the ideal
A board should compile a list of the troubled bank’s characteristics that will give the
highest probability of a successful and profitable troubled bank acquisition. The
geographic location and size of an ideal target, the severity of the target’s problems
and other important characteristics should all be considered.
It is unlikely a troubled bank acquisition opportunity will meet exactly each one of
the ideal characteristics. However, identifying the ideal characteristics before an
opportunity presents itself will allow a board to quickly gauge whether an opportunity
is worthy of further consideration.
Use Outside Assistance to Determine the Structure of the Acquisition
Recent troubled bank transactions have come in all shapes and sizes. Some recent
troubled bank acquisitions have been structured as whole bank purchases. Others
have been structured as a purchase of assets and assumption of liabilities. Some
modern troubled bank acquisitions are not acquisitions at all, but are more properly
characterized as equity injections. With an array of options available to troubled
bank purchasers, it is important for the acquirer and their consultants or attorneys to
identify exactly what acquisition structure will yield the greatest likelihood of a
successful troubled bank acquisition.
Be Vigilant In the Performance of Due Diligence
Troubled institutions are troubled for a reason. The majority of today’s troubled
institutions have earned their status as such because of poor or declining asset
quality. However, this is not the sole reason for the increase in the number of
troubled banks. A number of institutions have become troubled institutions because
of securities losses, fraud or embezzlement, or some other reason. There are two
critically important aspects of due diligence when acquiring a troubled institution.
First, the acquiring institution must determine exactly what is being purchased and
what led the troubled institution to its current condition. Second, the acquiring
institution must determine how the acquisition of the troubled institution will return a
In addition to determining what is being purchased and how it will yield a profit, a
healthy institution should devote time in due diligence to pricing issues. A troubled
institution, no matter how troubled it may be, could be a great deal if it is priced
correctly. On the other hand, a slightly troubled institution can turn out to be a bad
deal if the price is not right. A buyer should spend time during due diligence to
determine a purchase price that adequately reflects risk and expected returns.
Don’t Over Allocate Resources to the Troubled Institution
Troubled bank acquirers devote a substantial portion of their time and resources to
“fixing” their recent acquisition. While this is expected in a troubled bank acquisition,
over allocating financial or managerial resources to the recently purchased institution
can lead to a new set of problems. An acquirer with too much focus on a recent
acquisition can neglect their original, healthy institution and jeopardize its safety and
Troubled bank acquirers should be vigilant in their oversight of both the original and
the acquired institution. Particular attention should be paid to striking the right
balance of resources allocated to both. A healthy institution can quickly turn into a
troubled institution if too much time and resources are spent fixing the troubled
institution and not enough time and resources are spent maintaining the healthy
The near future will present a number of opportunities for healthy institutions to
acquire troubled banks. These acquisitions can prove to be a profitable strategic
move so long as the acquiring institution sticks to the fundamental principles of
buying troubled banks.
How Many to Fail; Do We Hear 1,000?
By Joe Adler
23 March 2009
(c) 2009 American Banker and SourceMedia, Inc. All rights reserved.
WASHINGTON - Predicting how many banks will fail in the next few years is quickly
becoming a booming business as the economy worsens.
With no official number from the Federal Deposit Insurance Corp., analysts, investors
and others are offering their own predictions - and none of them are very
Weiss Research Inc. of Florida said last week that more than 1,500 institutions were
at imminent risk of failure -roughly six times the size of the FDIC's "problem" bank
list in the fourth quarter.
Wilbur Ross, the famous investor, said there could be as many as 1,000 insolvencies
as a result of the housing crisis. Other analysts offer guesses all over the map.
About the only thing they agree on is this: the number of failures - which was at
17so far this year by American Banker's Friday deadline and likely to be higher by
today -will be extraordinarily high.
"Housing prices are still going down and most likely will continue to go down all
year," said Brad Hunter, the chief economist and national director of consulting for
Metro study, a market research firm based in Houston. "There will be more pressure
for write downs."
Hunter predicts 400 to 500 failures resulting from the downturn, but he said there
are still many factors that can affect the final tally. "It depends on what is done with
mark-to-market [accounting], and how many voluntary mergers and shotgun
weddings there are," he said.
David Zelman, the president of Zelman & Associates, an Ohio firm that provides real-
estate valuation data for banks, Realtors, regulators and other stakeholders, predicts
a figure between 800 and 1,000.
"The net of it is the majority of the exposure of the asset class" most hurt by the
crisis "is in small- to medium-sized community and small regional banks," Zelman
The one institution not playing this guessing game is the one with the most
knowledge: the FDIC. Instead, the agency has offered only a projection of the total
cost to the Deposit Insurance Fund, saying collapses will cost $65 billion in the next
Observers said the FDIC's reticence makes sense.
If the agency went public with a failure projection, it "would scare people and start to
have the potential for bank runs," Zelman said. "I don't think it's in their interest to
"I don't think the FDIC necessarily should, because they're a policy organization," he
said. "What they do, the way they comport themselves, and the level of pressure
they exert at any given institution could determine the pace" of failures.
While the private estimates are high, they are not completely out of line with the
pace of failures during the savings and loan crisis. From 1987 to 1990, 1,648
institutions were closed, with the largest tally, 534, coming in 1989.
But the estimates - and how they are calculated - of how the recent downturn will
affect failures are still varied.
Ross, the chief executive of W.L. Ross & Co., said he includes recipients of the
Troubled Asset Relief Program in his projections because "conceptually, if a guy
needed all that Tarp money, that means he couldn't make it on his own."
"Counting them in, which is a couple hundred, I would think it comes to something
approaching 1,000," he said.
Still, Ross said he could not give a more definite number of institutions the FDIC will
have to take over, "because I don't know how far Tarp will go."
Ron Glancz, a partner at Venable LLP and a former FDIC assistant general counsel,
said it used to be easier to predict the failure toll.
Now, the impact of the federal government's bailout may narrow the final count, and
the economic cycle is always in motion.
"I just don't think that, given where we are today, that you can actually predict in
any kind of certainty what the number is going to be," he said.
"It was easier years ago. There are a number of programs that the FDIC, Treasury
and the Federal Reserve Board have put in place that I think may in fact prevent
bank failures. We're not sure when the economy is going to turn around. Some
people say it will in 2010. But what if it turns around at the end of the year? That will
prevent bank failures."
Glancz said the FDIC must manage "a balance between transparency and the need
to be accurate and not to alarm the public."
"The bottom line is I don't think it's as easy to predict bank failures as it was years
ago," he said. "Secondly, there is a question of whether by saying it, you make it so.
... That's the concern I would have in terms of numbers."
Robert Hartheimer, a former FDIC director of resolutions, said the variance of these
predictions is understandable.
"Everyone has a different view of where the economy is going and the value of
banking assets and in particular commercial real estate values," said Hartheimer,
now a special adviser to Promontory Financial Group LLC.
"I'm not sure anyone is incorrect, but since it's an estimate, it really depends on the
assumptions that are being used from one source to another."
Carlyle Group Said to Raise $1 Billion to Buy Stakes in Banks
By Jonathan Keehner and Jason Kelly
Feb. 13 (Bloomberg) -- Carlyle Group LP, the world’s second- largest buyout firm, has
lined up about $1 billion to invest in banks as the Obama administration seeks to attract
private capital to troubled financial institutions, according to two people familiar with the
Carlyle, based in Washington, plans to raise as much as $3 billion for the new fund this
year after initially gathering $600 million in October, said the people, who asked not to
be named because the fund is private.
Firms including Carlyle and J.C. Flowers & Co. are increasing investments in financial
assets as loans for leveraged buyouts of companies remain scarce. Treasury
Secretary Timothy Geithner is trying to coax private investors into the effort to bail out
the U.S. financial system. Regulators have eased some rules to promote private
takeovers of banks.
“Private equity will figure prominently in bank consolidation this year,” said Chip
MacDonald, a partner with Jones Day in Atlanta who specializes in deals among
lenders. “Buyout firms have greater knowledge of the rules and regulators are taking a
more pragmatic approach to applying them.”
A Carlyle spokesman declined to comment.
Announced private-equity transactions dropped more than 60 percent to $211 billion last
year as a lack of Wall Street financing crippled deal making. Buyout firms are casting
about for ways to invest an estimated $450 billion in capital committed by their clients.
Flagstar, Boston Private
Matlin Patterson Global Advisers LLC put $250 million last month into Flagstar Bancorp,
a saving bank based in Troy, Michigan, through a so-called ‘silo’ structure that isolates
the investment from the New York private-equity firm’s other funds and holdings,
according to a regulatory filing. Flowers, also based in New York, in January joined a
group of investors to buy bankrupt IndyMac Bank from the Federal Deposit Insurance
Corp. and inject $1.3 billion in cash.
Carlyle in July said it invested $75 million in Boston Private Financial Holdings Inc., a
publicly traded asset manager. Carlyle, which has more than $89 billion under
management, hired Olivier Sarkozy from UBS AG last year to help run its financial-
services group, which includes former Treasury undersecretary Randal Quarles.
The FDIC said in November that it would allow groups without bank charters, including
private-equity firms, to bid for the deposits and assets of failing lenders. After consulting
with buyout firms, the Federal Reserve issued revised guidance in September easing
limits on minority investments in banks.
U.S. regulators this year have seized nine banks amid a credit crunch that fueled more
than $1 trillion in financial- company losses and write downs since 2007.
Billionaire Wilbur Ross, who focuses on distressed assets, has predicted a “massive
consolidation” among banks and pushed for regulatory agencies to loosen rules around
bank ownership by private-equity firms. In a Feb. 11 interview at his New York office,
Ross noted that individuals, investment banks and corporations all have the ability to buy
controlling interests in banks without submitting to the same rules as buyout firms.
“It makes no sense to me that the bulk of participants in the economy can own a bank,
but private-equity funds cannot,” he said, adding that his firm and others have bought
and turned around banks overseas. “It’s pretty bizarre that a private- equity fund is
permitted by a foreign government to buy a bank, but it’s not permitted by our
Ross last month agreed as an individual to buy 68.1 percent of Florida’s First Bank and
Trust Co. and said he plans to use First Bank and Trust as a platform to buy other
To contact the reporters on this story: Jonathan Keehner in New
York email@example.com; Jason
Failed banks for sale...who's buying?
A move by regulators to open up the failed bank bidding process has sparked a wave of
investor interest. But experts are wary about its real impact.
By David Ellis, CNNMoney.com staff writer
December 19, 2008: 6:00 AM ET
Lloyd's lessons from the 1990s
NEW YORK (CNNMoney.com) -- More banks will certainly fail in the months ahead, but at least
regulators shouldn't have any trouble finding buyers.
Last month, two of the nation's top banking regulators - the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency - widened the buyer pool for failed
banks by opening up the bidding process to both investor groups and individuals.
Traditionally, this process has been limited to chartered banks and savings institutions. But
regulators changed their stance partly in response to strong demand from non-bank investors and
expectations that the supply of failed banks will grow in 2009.
So far this year, only 26 of the more than 8,400 FDIC-insured institutions have failed. But with
171 institutions on the FDIC's so-called 'problem bank' list as of the end of the third quarter, it's
likely that the assets of many more failed banks will be up for grabs next year.
Waiting for a failure
Despite some high-profile bank mergers in the past few months, there has yet to be a major wave
of consolidation in the industry since many banks have been afraid of inheriting another
company's troubled loan portfolio.
Instead, many banks have waited for others to fail outright before stepping in. That's because
once the FDIC assumes control of the failed bank's troubled assets, an acquirer can get deposits
on the cheap and a clean balance sheet.
Officials at the OCC and FDIC were unable to provide any figures as to how many investors have
applied to buy failed banks so far. But they said interest in the program has been robust since it
One firm that has already won conditional approval to bid for a failed bank is Ford Group
Holdings, an investment group which includes long-time Texas bank investor Gerald J. Ford.
That interest could extend to wealthy individuals who want to break into the banking game and
even private equity players.Christopher Flowers, who runs the buyout shop J.C. Flowers,
scooped up a tiny bank in northern Missouri with $14 million in assets in August. At the time, he
hinted at plans to expand.
But private equity investments in the U.S. banking industry have fared poorly this year. The $7
billion stake in embattled savings and loan Washington Mutual taken by private equity giant TPG
was wiped out after the savings and loan giant collapsed in late September. So buyout shops
may be reluctant to place any more bets.
"I think you have investors sitting on the sidelines saying 'Let's just wait and see how the entire
business model shakes out,'" said Jess Varughese, managing partner at Milestone, a New York
City-based management consulting firm that focuses on the financial services industry.
Jennifer Thompson, an analyst at the New York-based financial services research firm Portales
Partners, added that the move to open up the bidding process for failed banks is largely symbolic
anyway since banks themselves already have a hearty appetite for the deposits of failed rivals.” It
is just adding to the perception of liquidity in the market," she said.
Nonetheless, regulators have said they hope that by relaxing standards about who can participate
in the program, they can fetch a better price for the assets of failed banks and better returns for
the FDIC's deposit insurance fund. The agency estimates that the fund, which is used to
guarantee deposits when a bank fails, will suffer about $40 billion in losses through 2013.
Last summer's collapse of the California-based IndyMac wiped out $8.9 billion from the fund.
Regulators have yet to announce a buyer for the troubled mortgage lender. But the program is
not without its risks. Faced with an overwhelming number of bank failures, banking regulators
enacted a similar move during the savings and loan crisis of the 1990s. That backfired, however,
after a number of failed institutions were sold to developers which used the bank to fund their own
"The regulatory agencies may be looking at some individuals that are very astute," said
one former staffer for the Resolution Trust Corporation, which the federal government
created to help handle failed institutions during the savings and loan crisis. "That may
look good now, but nobody really knows."
Insiders Reap Huge Profits On Purchase Of Failed South
By Bill Zielinski on April 10th, 2010
Myrtle Beach Bank Failure Results In Fast Profits For Insiders
South Carolina saw its first banking failure since 1999 as regulators closed the failed
Beach First National Bank of Myrtle Beach. The failed bank had total assets of $585.1
million and total deposits of $516.0 million. The cost to the FDIC Deposit Insurance
Fund (DIF) for this latest banking failures is estimated at $130 million. The cost to the
FDIC DIF for the 42 banking failures to date in 2010 now totals $6.6 billion.
The assets and deposits of failed Beach First were taken over by the Bank of North
Carolina under a purchase and assumption agreement with the FDIC. As has been the
case with almost all recent banking failures, the FDIC entered into a loss-share agreement
with Bank of North Carolina to limit the amount of losses on the purchase of the failed
banks’ assets. The loss share agreement covers $498 million (85%) of the assets
purchased by the Bank of North Carolina.
The FDIC has been sensitive to criticism about the profits being made on the purchase of
failed banks and has recently lowered the amount of loss protection on purchased failed
bank assets from 90% to 85%. (See One West Makes Billions on Failed Bank
Purchase). The FDIC needs buyers for the multitude of failed banks and without the
realistic expectation of profit from the purchase of a failed bank, the FDIC will have a
very difficult time finding buyers. This week’s bank closing is certain to raise the level
of debate over the FDIC’s competence in resolving banking failures on the best terms for
Despite the FDIC’s slightly reduced loss share protection, the Bank of North Carolina
apparently sees opportunity in the purchase of failed Beach First. Swope Montgomery,
CEO of BNC Bancorp, the parent company of Bank of North Carolina, stated that “This
transaction positions our company for the next stage of its development. We see
additional opportunities to serve customers in attractive markets in the Carolinas and
beyond, and plan to carefully deploy investor capital in the future to maximize long-term
shareholder value while taking care of our customers in our communities.”
Investors also apparently view the purchase of failed Beach First as a huge profit
opportunity for BNC Bancorp. The stock of BNC Bancorp skyrocketed 12.5% in after
hours trading, up $1.03 to $9.28. Bank management and insiders who hold almost 20%
of BNC’s float of 7.34 million shares, have instantly reaped a $1.5 million windfall,
courtesy of the US taxpayer who ultimately pays for the cost of failed banks (in this case
alone $130 million). Keep in mind that BNC Bancorp “purchased” failed Beach First
with no money down and an FDIC guarantee to pick up most of the losses on the failed
The FDIC’s public relations team may have to work a little harder to convince the public
that the purchasers of failed banks are not being enriched at the expense of the John Q
Public. Logical minds may wonder why investors are reaping billions in profits on the
purchase of failed banks while taxpayers are bearing the cost of hundreds of billions in
Bailed Out Bank Buys Failed Bank
Adding to the irony of this latest failed bank fiasco, BNC Bancorp received $31.3 million
in bailout funds from the US Treasury in December 2008, none of which has been
repaid. The funds were received under the US Treasury’s Capital Purchase Program,
described as follows by financialstability.gov:
Treasury created the Capital Purchase Program (CPP) in October 2008 to stabilize the
financial system by providing capital to viable financial institutions of all sizes
throughout the nation.
Through the CPP, Treasury will invest up to $250 billion in U.S. banks that are healthy,
but desire an extra layer of capital for stability or lending.
Under this voluntary program, Treasury will provide capital to viable financial
institutions through the purchase of up to $250 billion of senior preferred shares on
standardized terms, which will include warrants for future Treasury purchases of
common stock. Financial institutions participating in the CPP will pay the Treasury a
five percent dividend on senior preferred shares for the first five years following the
Treasury’s investment and a rate of nine percent per year, thereafter.
The funds invested in BNC by the US Treasury are, in this case, not likely to result in a
loss to the taxpayers and the US Treasury is receiving 5% in dividend payments. As of
February 2010, the US Treasury received $1.87 million in dividends on the preferred
stock issued by BNC to the Treasury under the CPP. In addition, if the stock price of
BNC continues to increase, the US Treasury will most likely recognize a gain on stock
warrants that were issued by BNC in conjunction with the preferred stock issue.
Aside from the fact that the US Treasury is probably going to fully recover its investment
in BNC, was the Capital Purchase Program (CPP) overly generous to a banking industry
that made exceptionally poor lending decisions? Some insight into this question can be
gained by looking at how BNC used the capital provided by the Treasury to score large
gains for BNC insiders and shareholders. Although some of the CPP funds were used by
BNC to satisfy the credit needs of its customers, a large amount of the capital from the
US Treasury was used to speculate on a leveraged investment in mortgaged backed
securities - this from BNC’s lastest 10k.
During 2008, the Company received $31.3 million from the UST for participation in the
CPP. The CPP gave us the opportunity to raise capital quickly, at low cost, with little
shareholder dilution, and continue to support the credit needs of our communities.
In conjunction with the funds received from the CPP, management began implementing a
strategy to deploy these funds into government agency sponsored entity mortgage-backed
securities, well before rates in this sector began to decline due to aggressive purchases by
the Federal Reserve, UST, and other community banks seeking to leverage their new CPP
funds. That strategy resulted in the Company purchasing $265 million of FNMA and
FHLMC sponsored mortgage-backed securities in November and December of 2008, and
an additional $76 million of bank-qualified municipal government securities during the
fourth quarter of 2008 and the first quarter of 2009. The tax equivalent yield on these
investments was 5.70%. These security purchases were funded by short-term deposits at
rates below 1.0% ….. This leverage transaction has provided sufficient net interest
income to offset the cost of the CPP dividend payments, and provide additional
operational income to the Company. During 2009, to meet our loan and asset growth
demands, we sold approximately $90 million of investment securities that were
purchased as part of the above leverage strategy, described above; recognizing gains in
excess of $3.7 million.
The massive government bailout of the banking industry in 2008 was necessary to
prevent a financial system meltdown, despite strong opposition by a skeptical public. In
2010, there is likely to be a justifiable surge of outrage as the public learns how special
interest groups are reaping billions in profits on FDIC sponsored failed bank purchases.
Purchasers of Failed Banks Reap $$Billions In Profits
OneWest Bank, FSB, is the fastest growing bank in the country since being newly
formed in early 2009 by a group of private Wall Street investors for the express purpose
of acquiring failed banks from the FDIC. OneWest’s first acquisition was done on
March 19, 2009, when it acquired the $32 billion asset Indy Mac Bank which had failed
in July 2008. In December 2009, OneWest acquired another large failed bank, First
Federal Bank of Los Angeles, which had $6.1 billion in assets at the time of closing.
With this week’s acquisition of La Jolla Bank, One West is now a banking empire with
over $40 billion in assets acquired from the FDIC.
The FDIC has been heavily criticized lately by those who question whether OneWest got
too good of a deal on its purchase of failed banks. Indy Mac was the most costly banking
failure in U.S. history at $10.7 billion and the FDIC could still face billions more in
losses under its loss-share transactions with OneWest. The question of whether OneWest
received a windfall at taxpayer expense became even more relevant this week when
OneWest reported huge profits of $1.6 billion last year.
The private investors who formed OneWest had initially contributed only $1.55 billion.
Bert Ely, a well respected banking consultant remarked that “This is one hell of a deal for
those owners, but hardly a good deal for the banking industry, which pays the FDIC’s
bills. These are just incredibly sweet numbers..The public policy question is, why are
they so good? Particularly given the magnitude of the loss estimated at the FDIC.”
The FDIC has been extremely sensitive to criticism on this matter and put out a press
release defending its actions, noting that the FDIC has yet to pay a penny to OneWest on
its loss-share agreements. The FDIC has been swamped with banking failures over the
past two years and at times has had difficulty attracting purchasers for failed banks
despite providing loss guarantees.
In the case of OneWest, however, the FDIC seems to have given away the store.
Wealthy private investors are reaping billions in profits while the banking industry is
being hit with huge FDIC assessments to cover banking failures and depositors are being
paid virtually zero on their bank savings. With possibly hundreds of more banking
failures to come this year, the OneWest bonanza is not the type of publicity that the FDIC
Bank big shots eying Ga. apply to start
bank in Fla.
A group of national banking all-stars said to have their eyes set on failed bank deals in
Georgia and throughout the Southeast have applied with Florida regulators to start a bank
in the Sunshine State.
Bank of the Southeast, said to include backers including a former Federal Deposit
Insurance Corp. chairman, and the former head of the Federal Home Loan Bank of
Atlanta (FHLB Atlanta), have applied for a charter with the Florida Office of Financial
Regulation’s Division of Financial Institutions.
The group, said to include former FDIC Chairman William Issac, also boasts ex-FHLB
Atlanta Chairman Ray Christman and Office of Thrift Supervision’s former Southeast
regional director, John E. Ryan, among its principals.
The charter application—along with a separate bid including former Bank of America
Corp. heavyweights—was first reported Thursday by Jacksonville Business Journal, a
sister publication of Atlanta Business Chronicle.
The Chronicle first reported about Bank of the Southeast and its interest in failed banks
The group is seeking to initially raise about $500 million from institutional and individual
investors, sources have previously told the Chronicle. The group could likely raise
upwards of $1 billion.
The group said in the filing it is based in Ponte Vedra Beach, Fla. In the filing, Ryan is
listed as chairman of the banking company, and his registered address is in Colony
Square in Midtown Atlanta. Bank of the Southeast would be a subsidiary of BSE
Management LLC. The group has also filed for a business license in Georgia, according
to the Georgia Secretary of State’s Office’s Web site.
David M. Moffett, former CEO and director of Freddie Mac, will be president and CEO
of both the bank and its holding company, Bancorp of the Southeast LLC.
Other key players involved are: Roger Helms, former First Union CEO of the Florida
market; Cecil Sewell, former chairman of RBC Centura Banks and former chairman and
CEO of Centura Banks of North Carolina; former SunTrust Banks Inc. executive vice
president William Serravezza; and former SunTrust Vice Chairman John Clay.
The proposed board of directors also includes some veteran Florida bankers such as
Robert Helms, retired president and CEO of Wachovia Bank of Florida, and the former
chairman, president and CEO of SunTrust Bank in Florida, George W. Koehn.
Private equity has been seen as a potential savior of banks, bringing needed capital to
stabilize one of the foundational industries of the nation’s economy.
Georgia leads the nation with 37 bank failures since August 2008, and private equity-
backed players have gobbled up 12 of those lenders (including the six bank subsidiaries
of Security Bank Corp. of Macon).
Isaac, the former FDIC head, has been linked to the group, but was not included in the
executives proposed in the filing, which was dated in February.
Sources within the Atlanta banking community have said the team previously had
inquired about acquiring a healthy Peach State lender and using it as a platform to go
after ailing institutions in northern Florida and Georgia.
The wave of private equity-backed buys that had been expected for more than a year
might be on the verge of cresting.
Capital willing to invest in failing banks is mushrooming on the sidelines, industry
sources say. Bank of the Southeast would join a growing field of private equity-backed
bank management teams scouring the region.
At least a half-dozen private equity investor groups have been rumored to be eyeing
Georgia, in addition to the two that have successfully completed deals here in the past
Milton Jones, the former market president for Georgia for Bank of America Corp., is
known to be heading a $1 billion group of former Wachovia Corp. and BofA big shots
seeking a “shelf charter” from federal regulators that would enable them to buy failed
Also Thursday, Jacksonville Business Journal reported North American Financial
Holdings Inc., a group led by former BofA Vice Chairman Eugene Taylor, has applied
with the Office of the Comptroller of the Currency for a charter. The group is armed with
more than a half billion in investor capital.
Nearly 200 banks nationwide have failed since the current banking crisis began in 2008,
and more than 700 banks are on the FDIC’s so-called “problem list.”
A rush to buy failed Florida banks
Private equity firms, which pool money from wealthy investors, and other nontraditional
buyers see big opportunities in bidding on failed banks in FDIC auctions.
Last year, 140 banks were seized by regulators. The FDIC expects even more banks to
fail this year.
Strong banks, feeling more upbeat about their outlook these days, remain the main
bidders at FDIC auctions.
The FDIC-backed deals are attractive. The agency typically agrees to shoulder 80 percent
of any losses on the old bank's troubled loan portfolio. That protects the new owners from
most of the risk of buying a failed bank.
Regulators are requiring special conditions for private equity firms to buy failed banks:
They aren't allowed to sell the banks for at least three years. And they have to keep
higher levels of capital to insulate against potential losses than traditional banks do.
John Kanas was at breakfast at the Four Seasons on Brickell Avenue recently when he
bumped into Daniel Healy, his former right-hand man who had helped him build a big,
profitable New York bank that sold for a princely sum.
These days, the two veteran New York bankers are still chasing bank deals. But they're
facing off as competitors in what is shaping up to be a gold rush to buy up failed Florida
banks under lucrative deals with the Federal Deposit Insurance Corp.
``It was kind of strange. There we were: I was with a client. He was talking with a
potential client,'' says Kanas, 63, former chairman and CEO of North Fork Bancorp -- and
the man who led a group of private equity firms in a pioneering bid to acquire the
collapsed BankUnited from the FDIC in May 2009.
Kanas' deal for BankUnited, the largest Florida-based bank, marked only the second time
regulators allowed private equity firms, which pool money from wealthy investors, to
own a bank.
Since then, dead banks auctioned off by the FDIC have become all the rage among the
smartest money on Wall Street. And Florida and Georgia are emerging as the El Dorado
of opportunity to pick up failed banks.
A quarter of all the troubled U.S. banks are in these two states, according to Miami
banking analyst Ken Thomas.
Healy's firm, Bond Street Holdings, raised $440 million through Deutsche Bank to focus
exclusively on acquiring flopped Florida banks. Bond Street's diverse group of investors
joined a ``blind pool,'' with the understanding they wouldn't know exactly what shape the
venture would take but that it would buy failed banks.
In January, Bond Street snapped up two small Florida banks in FDIC-assisted deals, and
it plans to acquire more. ``We want to build the next Barnett Banks,'' says Healy, 66, who
oversaw many bank acquisitions as former chief financial officer of North Fork. He is a
director at Keefe Bruyette & Woods, a prominent New York investment bank
specializing in financial-services companies.
His old boss Kanas is voicing the same ambition: to create another Barnett.
Barnett, which was the gem of Florida banking with operations across the state, was
acquired by Bank of America's predecessor in 1997 during an earlier wave of mergers.
At the Four Seasons, Kanas teased Healy, who was a top lieutenant for 14 years, for
getting back into banking.
``John made a joke: `You couldn't make a career out of banking the first time around so
you're going to try again,''' Healy recalls. But Healy takes it in stride. ``John is like my
brother,'' he says.
These days, it seems everybody and his brother wants a piece of the action as the FDIC
auctions off failed banks. Typically, the FDIC deals have alluring loss-sharing
agreements that shield the buyers from 80 percent of loan losses. The buyers, in turn, help
the FDIC by working through troubled loans to minimize the hit to the insurance fund.
``Loss-sharing is a very useful tool to allow the FDIC to operate more efficiently and
effectively,'' says FDIC spokesman David Barr. ``Less of our cash is wrapped up in
Barr says if the FDIC had to dispose of the bad loans, they'd likely get fire-sale prices.
Kanas pounced on the opportunity early in the dark days of the recession when few were
willing to act. After months of shopping BankUnited to potential buyers, the FDIC drew
only three bids. Kanas got the assets for a 24 percent discount to face value.
The new BankUnited already has posted fat profits: $163 million between May and the
end of 2009, a 26-percent return on investment.
That's sweet even for private equity firms, which expect fat returns. The BankUnited deal
has helped lure other nonbank investors to look at failed banks.
``There is a lot of private equity interested in banks,'' says Robert Tortoriello, an attorney
at Cleary Gottlieb Steen & Hamilton in New York.
Tortoriello helped Miami Dolphins owner Stephen Ross with his brainstorm to buy a
Ross made his fortune in real estate. But now he has teamed up with Jeff T. Blau and
Bruce A. Beal Jr., two top executives at The Related Companies, his New York real
estate firm, to form SJB Bank. The SJB name comes from Steve, Jeff and Bruce's first
Last fall, SJB got a shelf charter, which gives it authority to buy a failed bank when it
finds the right one. In February, SJB raised more than $1 billion in capital through
Deutsche Bank. But it hasn't yet bought anything.
Adolfo Henriques, a prominent figure in Miami banking circles, was slated to be the CEO
of Ross' new bank, according to regulatory filings. However, Henriques said last
weekthat he won't after all. Neither Henriques nor a spokeswoman for Ross would say
Others are taking a different approach than a new charter to get into the game. In
February, First Southern Bancorp in Boca Raton raised $400 million in fresh capital,
mostly from mutual funds and hedge funds, to ``supercapitalize'' the company. Its
strategy: to buy failed banks in South Florida.
``There's been a lot of interest in the last eight or nine months in this type of business
venture -- purchasing failed banks,'' says J. Herbert Boydstun, former CEO of Hibernia
National Bank in New Orleans. He led the investment and is chairman and CEO of First
At Bond Street, things happened fast. In January, Bond Street, based in Naples, won the
bidding for the failed Premier American Bank in Miami. A week later, the new Premier
acquired the failed Florida Community Bank in Immokalee. ``In a few short weeks we
were a banking company with $1.2 billion in assets and $875 in deposits,'' says Healy,
who has a home in Jupiter.
But Healy has a long way to go to catch up with Kanas: BankUnited has $11.1 billion in
assets and 77 offices in 13 counties.
Healy acknowledges that Kanas -- acting early -- got the sweetest deal from the FDIC.
``The BankUnited deal was the deepest discount,'' he says.
When BankUnited failed, the bank regulators were just cracking open the door to private
equity outfits, and few firms were geared up to navigate the regulatory maze. Meanwhile,
most banks were too focused on their own problems to think about bidding.
``If that deal [for BankUnited] was happening today, there would be more strategic
buyers [traditional banks]. But it didn't happen today. It was during a much deeper time
in the crisis,'' says Jimmy Dunne, senior managing principal of Sandler O'Neill +
Partners, an investment bank specializing in financial institutions.
Indeed, the FDIC already is getting less generous. Until recently, the agency has agreed
to shoulder 80 percent of loan losses on troubled portfolios with an added promise that
after a certain threshold, the agency would cover 95 percent of losses. That leaves a buyer
to swallow only 5 percent if things really go south.
But the FDIC recently decided it will no longer offer the 95 percent protection. So far, no
deal has had enough losses to hit that threshold anyway.
Kanas, for his part, won't crow about his good fortune. ``Frankly, we're very pleased,'' he
says solemnly. ``We've met and or exceeded all of our expectations