BankUnited IPO shouldn’t embarrass Sheila Bair
At first blush, the expected IPO of BankUnited looks designed to leave Sheila Bair red-faced. The chairman of the Federal Deposit Insurance Corp sold the Florida bank, with $13 billion of assets, to a group of private equity investors in May 2009 for a song. Any profit they make will sound indecent next to the FDIC’s projected losses on the deal.
But Bair needn’t be embarrassed. As one of the first big rescue operations of the crisis, the BankUnited deal piqued investor interest for banks. That arguably helped reduce overall losses to the insurance fund, whose ultimate backstop is the American taxpayer.
True, it’s not going to look pretty for the FDIC when BankUnited goes public, which it can do from late next month under the deal it brokered 18 months ago. Investors including Carlyle, Blackstone, Wilbur Ross and Centerbridge backed veteran banking boss John Kanas when they plugged the institution with $900 million of fresh capital.
To entice this crew, the FDIC had to promise to share losses on $10.7 billion of BankUnited’s total $12.8 billion of assets. The FDIC’s estimated cost at the time was a whopping $4.9 billion — or 46 percent of the assets covered under the agreement. That’s double the loss ratio estimated on deals taking place this year, according to KBW.
But that’s sort-of the point. To attract capital and competition in the bidding for assets, the FDIC needed to let some high-profile deals through the door. BankUnited, and a similar one for the assets of IndyMac, galvanized the attention of sharp-elbowed private equity barons. That, in turn, got rival healthy banks into the mix.
Quickly after the BankUnited deal, the FDIC changed the rules. It made it harder for private equity to grab assets cheaply. And by forcing them to hold the investments for longer, it reduced potential internal rates of return. Moreover, the FDIC learned to better negotiate for a piece of any upside by demanding warrants over some of the equity.
However much BankUnited makes for its investors probably will look scandalous against the FDIC’s losses on the deal. But in comparison to the billions the FDIC may have saved since, it could be a rounding error.