The FDIC: An IMterview with Heidi Moore

By Felix Salmon
March 23, 2010
FDIC lotto and being allowed to take over the assets and deposits of other, failing banks. But I was left wanting more, especially when it came to her conclusion, so I took to IM:

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Heidi Moore has a good story today about the banks winning the FDIC lotto and being allowed to take over the assets and deposits of other, failing banks. But I was left wanting more, especially when it came to her conclusion, so I took to IM:

Felix Salmon: You write “The FDIC’s pool of buyers—large or small—is getting tapped out” and that “as many buyers as the FDIC can find, it is not likely to be anywhere as many as it needs”.

Can you tell me a bit more about that?

Heidi Moore: Yes, definitely.

Felix Salmon: Once someone like Stearns takes over a bank, does that make it harder to take over another?

Heidi Moore: First, there is the expectation by many that bank failures will be higher in ’10 than they were in ’09. So the sheer numbers will be more.

Felix Salmon: If the sheer numbers just stayed constant, and the number of failures in 2010 stayed at 2009′s high level, would there still be a problem?

Heidi Moore: Yes

Felix Salmon: Are 2009′s buyers tapped out, as it were?

Heidi Moore: “Tapped out” is extreme. but they’re closer.

The FDIC has a mail list of about 400-600 banks or so that it contacts whenever a bank is coming up for auction.

These banks are chosen due to their strongish capital ratios

Felix Salmon: And that list more or less sufficed during 2009

Heidi Moore: Yes, although there were a handful of banks that simply didn’t get sold

Felix Salmon: But sometimes the capital ratios take a ding when a failed bank is taken over?

Heidi Moore: Yes, exactly. Every time you buy a failed bank, even if the FDIC is guaranteeing the assets, there are still some bad loans that need to be covered by adequate capital. There are few banks that can maintain high capital ratios to cover their own losses as well as the losses of more acquisitions.

And the FDIC is always checking in on them. For instance, they can’t apply the profit from an acquisition toward the capital ratio.

Felix Salmon: So it’s rare-to-never that an acquiring bank comes out of one of these deals with a capital ratio as good or stronger than when it went in.

Heidi Moore: There are enough repeat buyers that it’s not impossible. But yes, a hit is inevitable.

Felix Salmon: Which means that there’s basically a finite pool of excess capital at those 400-600 banks, and the FDIC is slowly depleting that pool.

Heidi Moore: Not “depleting” because the FDIC doesn’t sell unless the bank has proof that its cap ratio will bounce back.

Stearns, for instance, has a tier one ratio of something like 17%, and it has made 5 acquisitions.

Felix Salmon: Has its capital been depleted at all by those acquisitions?

Heidi Moore: This is why the stock-warrants plan is so great; banks can buy FDIC banks without handing over cash that could hurt the capital ratio.

Felix Salmon: So this is why I’m confused. If Stearns can buy banks without hurting its capital ratio, then why can’t it continue to do that more or less indefinitely?

Heidi Moore: The expectation of the FDIC is that the capital ratios will take a hit. That’s the risk inherent in the acquisition. So FDIC tries to mitigate it by offering loss-sharing, warrants, etc. There’s only so many times they can go back to that well, though, which is why they’re opening the door to private equity now.

I actually saw a FDIC document where they said “we’re running out of buyers”.

Once the IMterview was over, Heidi got a statement from the FDIC saying that “We are still seeing first-time buyers, and in the few cases when we can’t find a buyer for a failing bank, it is usually due to the make up of the failed bank’s deposits.” So it’s a bit unclear whether or not the FDIC is actually running out of buyers or not. But it’s certainly something that the FDIC should be worried about: it makes intuitive sense that if the FDIC only has a few hundred qualified buyers, and the number of bank failures is continuing to rise, then eventually it might run out of buyers. But whether that means that private-equity shops will finally be given the opening they’re looking for remains to be seen.


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The entity that is balance-sheet constrained is the FDIC. FDIC doesn’t have the balance sheet to hold very many failed banks, would have a hard time raising fees again, and doesn’t want to request more money from Congress (since we still operate on the fiction that the banking industry can backstop its own insurer). In order to get at least some of the assets off the FDIC’s books, they’ve had to offer very nice terms to banks. Many of the transactions discussed above were ludicrously good deals for banks, and you can be sure there are plenty of banks that would like similar deals. There also are plenty of well-capitalized banks, what with the enormous government support, resultant ease of raising capital, and cutbacks in new loans.

So the only way I could see a decline in FDIC-assisted takeovers is if the FDIC gets money from Congress to openly subsidize banking industry losses with taxpayer money (politically unlikely). Any attempt by the FDIC to get tough on terms with acquiring banks will lead to the FDIC holding assets it doesn’t have the capacity to fund and overwhelming the ability of its staff to manage failed banks. The most likely outcome is that the FDIC continues to get to the terms necessary to induce the best-capitalized banks to take over failed banks, because there’s not really another practical way to resolve bank failures. It’s politically much easier to cut a good deal with a decently healthy bank that helps existing shareholders and allows the bank to raise new capital than it is to get more money into the FDIC.

If small banks run out of acquisition appetite in the next year or so, it’s pretty easy to imagine the national and regional banks that are currently focused on integrating past acquisitions and paying off TARP coming back to the FDIC to fill gaps in their branch network and deploy unused capital. In the worst-case scenario maybe we have to start selling our bad banks to Canadians, Barclay’s and Santander (not sure of the law here).

Posted by najdorf | Report as abusive


You and Ms. Moore fail to mention the operational and management side of the equation. Regardless of balance sheet strength, there’s the question of management time for integration of everything from IT systems to credit practices. It also takes time to conduct due diligence on a target.

Particularly for acquirers who are smaller, which was the focus of Ms. Moore’s article, the people who evalute and integrate acquisitions are more than likely the same managers who are the top management of their own institution or run functional areas (credit, IT, legal, etc.) on a day-to-day basis. These institutions don’t have the management depth of an institution like JP Morgan Chase or Wells Fargo, which have the resources to maintain full-time business development/M&A and integration teams if they so choose.

Finally, I find it quite odd that the FDIC feels that a relatively small bank in Minnesota, with no prior knowledge of nor experience in the Florida or Georgia markets, makes a logical acquiror of a failed institutions in those markets. (My understanding is that Stearns, profiled in Ms. Moore’s article, operated only in Minnesota and Arizona prior to purchasing failed institutions in FL and GA during 2009.) It shocks me that the FDIC would choose such an institution over a management team with knowledge of local markets backed by private equity, but I understand that to be the FDIC’s current position.

Posted by realist50 | Report as abusive