Opinion

Felix Salmon

When bankers make windfall profits from the FDIC

By Felix Salmon
November 11, 2010

Elizabeth Warren has been doing the rounds in recent days, extolling the virtues of small community banks and talking about how tough it is for them to compete with the big guys. It certainly seems that way over at the FDIC, where the list of bank failures in 2010 is up to 143 and counting—already more than the 140 banks that failed in 2009.

And then there’s BankUnited, which was bought from the FDIC by a bunch of private-equity honchos in May 2009 and which has already filed to go public with a valuation of $2.7 billion or thereabouts.

Rob Cox has a great column on the deal, concentrating on the instant riches accruing to BankUnited’s CEO, John Kanas. Cox has found a smoking-gun quote from Kanas when he sold North Fork, making $185 million for himself: “It’s not like I flew in here on a private jet three years ago and prettied up the company and then booted it out of here.”

In the case of BankUnited, by contrast, Kanas seems to have found himself with a $68 million stake in the bank, plus millions more in salary, bonus, pension, and the like, in the course of just 18 months.

How is this possible, when banks elsewhere are dropping like flies? The simple answer is that Kanas and the other BankUnited investors are taking money straight from US taxpayers*: the FDIC lost $4.9 billion when it sold BankUnited, it’s guaranteeing more than 80% of the bank’s assets, and the future income stream from the FDIC to the bank is worth a whopping $800 million.

As Cox says, “for the FDIC and its chairman, Sheila Bair, it won’t look good.”

It’s possible to attempt a positive spin on all this—in fact, Cox himself made the case, a couple of weeks ago, that the BankUnited deal was so gloriously profitable for its investors that it sparked a broader resurgence of interest in buying banks, saving billions for the FDIC over the long term. And what’s more, the FDIC cracked down on the ability of private equity players to buy banks shortly after the BankUnited deal closed: this story isn’t going to have many sequels.

But if BankUnited’s clever financiers have made billions of dollars with their clever financing, you can be sure that the equally clever financiers at JPMorgan and other FDIC counterparties are also sitting very pretty. They’re just not making their FDIC profits so obvious.

The big point here is that smaller banks in the real world, forced to try to make money from banking their real customers, are continuing to fail at a depressingly high rate. Meanwhile, huge financial profits can be made by swooping in and buying distressed assets from the FDIC, which has become an engine for consolidating assets and profits in a handful of highly profitable financial institutions.

It certainly looks as though the FDIC is selling dimes for a nickel to its highly exclusive group of qualified buyers, and that purchases from the FDIC have invariably turned out to be fabulous deals. That’s not the boring banking that the US wants to see: instead, it’s the kind of high-stakes dealmaking which makes Wall Street so resented in the heartland, and which, clearly, is never going to die.

*Update: The FDIC’s Andrew Gray emails to say that FDIC losses are borne by the banking industry’s deposit fund rather than taxpayers, which is a fair point, although ultimately those FDIC funds come from people with bank accounts, and that’s more or less the same thing as taxpayers. And the FDIC is of course a part of the US government. He adds that the FDIC took the least costly bid for BankUnited, as required by law. But did the FDIC have to sell that quickly?

Comments
8 comments so far | RSS Comments RSS

Wall Street resented in the heartland, Felix?
Show me where.

Posted by kbemies | Report as abusive
 

I can accept that this is ever going to change.

However, the FDIC can retain 20% ownership of every such bank that it sells. Whether the shares are kept or dumped in an IPO isn’t the biggest point. But 20% would recoup a significant portion of the losses.

http://blog.mdwoptions.com

Posted by MarkWolfinger | Report as abusive
 

Best hopes for future FDIC assements to take into account things like:

Capital ratios (lower = lower assements)

Growth rates (Lower = lower assements)

CRA scores (Higher = lower assements)

Posted by y2kurtus | Report as abusive
 

Oh dear… I ment that higher capital ratios would result in lower FDIC assements.

Posted by y2kurtus | Report as abusive
 

Flowers’ group bid was higher…

“Flowers’s Higher Bid for BankUnited Assets Lost to Kansas Group”
http://www.bloomberg.com/apps/news?pid=n ewsarchive&sid=aJn7i1Vwnihw

*imho*

Posted by PPY | Report as abusive
 

Why is hardly anyone paying attention to the FDIC and its abuse of power during the current financial crisis?

Why has most mainstream media outlets continued to praise the FDIC when the agency (reprimanded by its own Inspector General for being a poor regulator), through its reckless and capricious decision makings, ended up destroying thousands of jobs and wiped out billions of dollars in retirement investments and pension plans belonging to hardworking average Americans?

Oh well :(

*imho*

Posted by PPY | Report as abusive
 

Horsefeathers. You and Rob Cox do not get it. When you buy a dead bank for pennies on the dollar and then execute on the assets, you make a lot of money. But the profit is created by the receivership, not special deals. The liquidation of a bank is a terrible loss to shareholders, creditors, vendors, etc. The buyer of the dead bank’s assets gets a deal. There is nothing remarkable about BankUnited vs. many other resolutions. They all have this characteristic. Remember that Jamie Dimon paid three cents on the dollar for WaMu assets and the FDIC did not take a loss. Chris

Posted by rcwhalen | Report as abusive
 

The FDIC provides coverage or a guaranty to an acquiring bank for possible additional losses on the acquired, failed bank assets.

An FDIC “Indemnification Asset” represents the present value of the estimated losses on covered loans to be reimbursed by the FDIC based on the applicable terms of the Loss Sharing Agreement.

Despite the intent of “Loss Sharing” to bring order and calm to the commercial debt markets via long term asset management, some FDIC-assisted banks have raced to recognize and convert to cash loan impairments, liquidating assets as quickly as possible in order to be reimbursed by the FDIC for Loss Sharing losses.

In one of the rare instances of transparency into the Loss Sharing process as value proposition, we see that BankUnited “has received $863.3 million from the FDIC in reimbursements under the Loss Sharing Agreements for claims filed for losses incurred as of June 30, 2010″ and has at least $2.9 billion (in present value) to go.

Posted by CRE_Views | Report as abusive
 

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