Thursday, July 02, 2009

FDIC on Private Equity Acquisitions of Failed Banks

by Calculated Risk on 7/02/2009 02:02:00 PM

This is BFT (Bank Failure Thursday), and there are a couple of large banks that might fail (Corus Bank and Guaranty Bank), so this is timely ...

First, from MarketWatch: FDIC chills private-equity bank bidders

The Federal Deposit Insurance Corporation on Thursday urged tough capital requirements on private equity firms buying battered banks, and said any firms they buy must be held for at least three years.
...
"Private-equity investors are probably going to lose their zeal for investing in this undervalued market because the upfront costs will be too much," said Lawrence Kaplan, of counsel in the banking and financial institutions group at law firm Paul Hastings and a former special counsel at the Office of Thrift Supervision.

"The FDIC is saying to private-equity firms that 'while we like your money, we're going to make it too expensive,'" he added.
From the FDIC: FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank Acquisitions

FDIC Chairman Sheila Bair's Statement
I am particularly concerned with new owners’ ability to support depository institutions with adequate capital, management expertise, and a long term commitment to provide banking services in a safe and sound manner. Obviously, we want to maximize investor interest in failed bank resolutions. On the other hand, we don’t want to see these institutions coming back. I remain open minded on many aspects of this proposal, including the categories of investors to whom it should apply, the appropriate level of upfront capital commitments, and the operation of cross guarantee provisions and limits on affiliate transactions. I look forward to receiving comments in these areas.

I support the transactions we have completed to date which have involved sales to private equity owners. We have imposed some special restrictions on these, including higher capital requirements. However, some have suggested that capital requirements should be even higher, given the difficulties in enforcing source of strength obligations outside the initial capital investment made by the acquirers in so-called “shell” structures. I know that this will be a contentious area, and we are opening high, with a proposed 15% requirement.

I am also troubled by the opacity of some of the ownership structures that we have seen in our bidding process, though these have not been winning bids. We have seen bids where it has been difficult to determine actual ownership. We have seen bidders who have wanted permission to immediately flip ownership interests. We have seen structures organized in the secrecy law jurisdictions. So based on the experiences we have gathered, I think it is prudent to put some generic policies in place which tell non-traditional investors that we welcome their participation, but only if we have essential safeguards to assure that they will approach banking in a way that is transparent, long term, and prudently managed.
Federal Register Notice