Thursday, July 30, 2009

FDIC Poised to Split Banks to Lure Buyers

By ROBIN SIDEL, Wall Street Journal

The Federal Deposit Insurance Corp., grappling with the worst banking crisis since the 1990s, is poised to start breaking failed financial institutions into good and bad pieces in an effort to drum up more interest from prospective buyers.

The strategy, which is likely to begin soon, is aimed at selling the most distressed hunks of failed banks to private-equity firms and other types of investors who may be more willing than traditional banks to take a flier on bad assets. The traditional banks could then bid on the deposits, branches and other bits of the failed institution that are appealing.

"We want banks to participate in the resolution process, but we know it's a tough time for banks to participate in the resolution process," said Joseph Jiampietro, a senior adviser to FDIC Chairman Sheila Bair. He made the comments Wednesday during a presentation to a community-banking conference in New York sponsored by Keefe, Bruyette & Woods Inc., a boutique investment firm that specializes in financial services.

Regulators have seized 64 banks this year as the credit crisis continues to wreak havoc on small institutions that have been hit hard by the collapse in housing prices and deteriorating commercial real estate. Although the banks are technically seized by other regulators, it is the FDIC's job to dispose of the assets in a cost-effective manner.

The FDIC has found buyers for most of the failed institutions, but many prospective bidders are leery of taking on bad loans from a shuttered bank. That remains the case despite the FDIC's efforts to encourage bidders by providing loss-sharing agreements in about 40 of this year's bank failures.

Just last week, State Bank & Trust Co. of Pinehurst, Ga., entered into a loss-share transaction with the FDIC on about $1.7 billion of assets of Security Bank Corp., which owned six banks in Georgia that had a combined $2.8 billion in assets.

But those types of deals aren't providing enough comfort to the FDIC, which wants to see a more-vibrant auction process.

"There are certain situations when assets are so distressed and make up a significant percentage of the balance sheet that strategic buyers are hesitant to participate in the process," said Mr. Jiampietro.

Details of the FDIC's latest effort to generate more bidding interest still are being worked out, but "we hope this will have greater appeal to strategic buyers," said James Wigand, deputy director of the FDIC's division of resolutions and receiverships, who also spoke at the conference.

The agency is considering several structures, including transferring the bad assets to a new entity established by the FDIC that will then be sold off. Another option, the FDIC officials said, is to allow traditional bidders to team up with buyers for the distressed assets.

Mr. Jiampietro said the FDIC is "pretty far along" in determining the best structure to entice bidders, and such a transaction could take place in the coming weeks.

Sanford Brown, a banking-industry lawyer at Bracewell & Giuliani LLP in Dallas, said the new structure may give comfort to banks that like a failed bank's deposits and real estate, but are leery of taking on its loans.

"There are relatively few bidders in a lot of these situations, and in some cases there is only one bidder," he said.

The strategy could provide an opportunity for private-equity firms that complain they are being hamstrung in their efforts to buy failed banks. This month, the FDIC proposed guidelines for private-equity investors that could make it more difficult for them to compete against traditional banks for failed institutions.

Among other things, private-equity investors would be required to hold higher capital reserves than traditional banks. Although the proposals are aimed at deterring private-equity investors from buying and flipping failed banks, the firms contend that they would create an uneven playing field between private equity and traditional banks.

Write to Robin Sidel at robin.sidel@wsj.com