Monday, December 28, 2009

FDIC Draws Brisk Bidding on Loans by Failed Banks

DECEMBER 23, 2009

By LINGLING WEI, Wall Street Journal

Investors are jostling for the chance to buy a $1.1 billion package of commercial real-estate loans extended by failed banks, as these once-toxic assets attract growing interest.

More than a dozen investors, including Texas banker Andrew Beal, have submitted bids to the Federal Deposit Insurance Corp. for the portfolio of loans held by Franklin Bank, IndyMac Bank and other failed lenders, according to people familiar with the matter.

But the portfolio represents only a fraction of the real-estate loans held by the FDIC and the volume is mounting as more banks fail.

The FDIC, which declined to comment on pending transactions, is expected to announce the winning bidder within weeks in what will be its second-largest bulk sale of commercial-property assets since the downturn. The largest deal involved the sale in October of about $5 billion in condominium loans and other property made by now-defunct Corus Bank.

Demand for these assets, at a discounted price, has grown intense. Investors have amassed billions of dollars to buy distressed loans and property much as investors like Sam Zell did in the early 1990s.

"A lot of investors are anxious to invest cash they have raised," said David Tobin, a principal with Mission Capital Advisors, a loan-sale adviser.

But many banks won't sell. Some, especially community and regional banks, haven't marked down the value of their existing loan portfolios to current market rates—something that could jeopardize the survival of weaker lenders. Many hope the low cost of funds offered by historically low interest rates will let them earn their way out of trouble.

"They don't want to be blowing the entire mess out at the low point of the cycle," says John Howley, an executive director and specialist in loan sales at Cushman & Wakefield, a real-estate firm.

That makes the FDIC practically the only game in town.

The agency has to sell off a growing pipeline of real-estate assets acquired from banks that collapsed after lending too aggressively to owners of offices, shopping malls, apartments and other commercial property.

Consolation Prize

Demand for its current package of loans is a consolation of sorts for the FDIC, which is trying to limit taxpayer losses and shore up its deposit-insurance fund. An avalanche of bank failures wiped out the fund in the third quarter of this year, putting it at negative $8.2 billion at the end of September.

While the loans are expected to be sold for a steep discount, experts say, the competition should drive the price higher. Also, the FDIC is structuring the deal so taxpayers will share in the upside if the market improves.

Despite the strong interest from investors, the FDIC faces growing challenges to unload the assets. A total of 140 banks have gone belly up so far this year. Currently, the FDIC has about $30 billion in real-estate debt held by failed banks that is available for sale for the next 12 months, according to the agency. That figure is double the level a year ago.

In most FDIC deals involving failed banks during the current downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed. But for some failed banks like Corus, Franklin and IndyMac, the FDIC has decided to sell some hard-to-value assets separately.

These bulk sales use a public-private partnership structure pioneered by the Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess in the early 1990s.

The set-up enticed private investors to buy distressed real-estate assets while giving the government the opportunity to make money on behalf of taxpayers should the assets rise in value.

Since last year, the FDIC has sold residential and commercial loans through eight such partnerships, with the agency's equity interest ranging from 50% to 80%. Those partnerships bought loans at discounts ranging from pennies on the dollar to more than 50 cents on the dollar of face value.

These structured deals, however, carry additional risk for the FDIC and, by extension, taxpayers. Because the agency takes a big chunk of the equity and provides financing, it stands to lose more if the markets continue to decline.

Under the options being considered for the $1.1 billion package, the FDIC would likely hold a 60% stake and provide financing. Deutsche Bank AG is advising the FDIC on the auction.

The portfolio consists of mostly nonperforming commercial property loans. Both Franklin, led by mortgage-bond pioneer Lewis Ranieri, and IndyMac were best known as home-mortgage lenders. But they also lent heavily to home builders and other property developers during the boom times, in states from California to Texas.

According to Foresight Analytics, Franklin had a total of $1.6 billion in commercial real-estate loans as of the third quarter of 2008, before its closure last November, and IndyMac had about $2.8 billion in such loans before its failure in July 2008.

Among the bidders for the portfolio is Mr. Beal, whose Beal Bank laid low during the boom years and avoided much of the real-estate bust. It has since gone on an opportunistic buying and lending binge, increasing its assets to more than $9 billion from $2.9 billion in 2007.

'Good Opportunities'

"We're in the business of buying loans," said Mr. Beal, a math whiz who likes to drive racecars in his spare time. "There are good opportunities, but investors have to be careful of what they buy and what they pay for."

He said the bank's goal is to buy performing loans at discounts. If the borrower defaults, the bank may modify the terms to bring it back to current. The bank would make money as long as the borrower stays current on modified terms.

—A.D. Pruitt
contributed to this article.
Write to Lingling Wei at lingling.wei@dowjones.com

Wednesday, December 23, 2009

Seven U.S. Banks Are Seized, Raising Year’s Failure Toll to 140

Dec. 19 (Bloomberg) -- Seven U.S. banks were seized by regulators, bringing this year’s total of failed lenders to 140 as financial companies are tested by the recession and the Federal Deposit Insurance Corp. anticipates more shutdowns.

Banks with $14.4 billion in total assets were closed yesterday in six U.S. states, the FDIC said in statements on its Web site. The agency is overseeing the dissolution of banks at the fastest pace in 17 years.

Two of the closures were in California. The assets and deposits of Federal Bank of California in Santa Monica were bought by closely held OneWest Bank, which acquired IndyMac Federal Bank this year. Imperial Capital Bank was bought by City National Corp., the Beverly Hills-based parent of City National Bank, which expanded in Southern California with the purchase.

“Imperial Capital Bank is a very good fit for City National, given that eight of its nine locations are in communities we serve,” City National Chief Executive Officer Russell Goldsmith said in a statement. “We’re pleased to contribute to the increased stability of the banking system.”

Federal Bank was the biggest lender seized yesterday, with $6.1 billion of assets and $4.5 billion in deposits, according to the FDIC. Based in La Jolla, Imperial Capital had assets of $4 billion and $2.8 billion in deposits.

Earlier this week, the FDIC boosted its 2010 budget by 56 percent to $4 billion to manage further shutdowns. The total budget will increase from $2.6 billion and the set-aside for bank failures doubles to $2.5 billion over this year, according to a proposal approved by the FDIC board. The agency staff will increase to 8,653 next year from 7,010 this year.

‘Larger Number’ of Failures

The budget “will ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary,” FDIC Chairman Sheila Bair said in a statement. Yesterday’s bank closings will cost the agency about $1.8 billion, according to the FDIC statements.

U.S. lenders are buckling under the weight of loans tied to commercial real estate, which is plummeting in value. Prices have dropped 43 percent from their peak in October 2007, Moody’s Investors Service said last month.


To contact the reporter on this story: Dan Reichl in San Francisco at dreichl@bloomberg.net

Thursday, December 17, 2009

Regulators Resist Volcker Wandering Warning of Too-Big-to-Fail

Bloomberg News

Dec. 15 (Bloomberg) -- Paul A. Volcker visited nine cities in five countries in the past eight weeks to warn that bankers and regulators “have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years.

“There is a lot of evidence that financial weaknesses brought us to the brink of a great depression,” Volcker, 82, said Dec. 8. at a conference in West Sussex, England. He told executives there that the changes they’ve proposed are “like a dimple.”

Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net.

There’s little evidence that policy makers are heeding Volcker, the former chairman of the U.S. Federal Reserve. More than 50 regulatory overhaul proposals have been submitted in the U.S. and Europe, the data compiled by Bloomberg show. Lawmakers and regulators have debated new rules for capitalization and leverage, central clearing for derivatives trading, oversight of hedge funds and ways to monitor systemic risk.

While the U.S. House of Representatives has approved a financial regulation bill, authorities in the U.S. and Europe have sidelined measures that would automatically force changes in the structure of financial companies that Bank of England Governor Mervyn King called “too important to fail.” Volcker is leading a chorus arguing for restricting the size or primary functions of financial institutions.

Volcker’s Travels

“He is spot on,” Joseph Stiglitz, a Columbia University professor who won the Nobel Prize in economics in 2001, said in an e-mail.

Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, told Kentucky’s Georgetown College students “we need to produce more, finance less,” according to the school’s Web site, and said in Bonn that some banks have “pervasive conflicts of interest.” In Berlin, he told Bloomberg television that “this isn’t any time to go back to business as usual.”

After Volcker became chairman of the Federal Reserve in 1979, he restricted the money supply, forcing interest rates to 20 percent to break an inflationary surge. Following the recession that ensued, President Ronald Reagan nominated Alan Greenspan in 1987 to replace Volcker, who had succeeded in driving the inflation rate to 1.1 percent by the end of 1986.

Dubai, China

A new debt crisis may threaten the economy before regulatory changes are enacted, according to Simon Johnson, an entrepreneurship professor at Massachusetts Institute of Technology in Cambridge and a former International Monetary Fund chief economist. Most of the world’s large international banks continued to expand as stock markets plunged and credit froze last year, data compiled by Bloomberg show.

After Dubai, the second-biggest sheikhdom in the United Arab Emirates, said Nov. 25 that it might delay debt payments by a development unit, analysts questioned whether the European Union would back Greece’s debt, roiling Greek stocks and bonds. Abu Dhabi promised yesterday to help the Dubai unit avoid defaulting. In China, a 4 trillion yuan ($585 billion) stimulus package, five interest rate cuts since September 2008 and $1.35 trillion in lending this year may lead to an asset bubble, according to Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas SA.

“Making meaningful regulatory changes is urgent now because this is the window of opportunity,” MIT’s Johnson said in an interview. “If that window closes, we’re asking for trouble.”

Resolve Fades

U.S. and European governments’ $15 trillion of guarantees, cash injections and other financial industry support, based on Bank of England data, may have been too successful. After Obama and other leaders opened 2009 promising sweeping financial overhaul, credit thawed, markets rebounded and resolve for “fundamental reform” faded, according to Susan Hoffman, a professor of political science at Western Michigan University in Kalamazoo and author of the book “Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions.”

Bloomberg News interviewed lawmakers, investors, economists, analysts and academics from 11 countries and reviewed draft laws and rules in the U.S. and Europe, the epicenters of the crisis of 2007-2008. The measures included those by members of executive or legislative branches in the U.S. and EU and by the Basel Committee on Banking Supervision, which recommends standards for financial institutions for 27 countries including the U.S., Russia, Japan and Brazil.

State of Play

The survey found that most of the more than 50 proposals are still being debated. Among at least 14 adopted are limits on banker pay in France, the U.K, and the Netherlands; more stringent testing of banks’ ability to withstand losses in Germany; and tougher capital rules in Switzerland.

In the U.S., Congress isn’t likely to pass final legislation until next year, as Obama and the Democratic leadership have made health-care overhaul the top priority and lawmakers face resistance from Wall Street banks, hedge funds and the U.S. Chamber of Commerce. Financial companies historically are the largest donors to congressional election campaigns, according to the Center for Responsive Politics in Washington.

House Bill

The House voted 223-202 Dec. 11 to approve a package assembled by the Financial Services Committee. The bill would heighten consumer protections, expand oversight of hedge funds and derivatives and set up a mechanism to allow -- without requiring -- regulators to dismantle large firms whose failure could threaten the economy. The Senate is writing its own law.

“The House of Representatives has acted to leave the age of dishonesty, recklessness and irresponsibility behind,” said Speaker Nancy Pelosi, a California Democrat, after the vote.

The European Commission, the EU’s executive arm, has proposed a European Systemic Risk Board similar to authorities being considered in the U.S., with the power to warn national regulators of risks. EU bodies are also developing rules on derivatives, hedge funds and bank capital.

Asia accounted for 2.5 percent of the $1.71 trillion in losses and writedowns by banks and insurers during 2007-2008, data compiled by Bloomberg show. Regulatory overhaul steps by Japan include expanding financial inspections of insurance and securities companies. China asked its biggest banks to increase capital ratios to at least 11 percent from 10 percent. The minimum set by the Basel committee is 8 percent.

Great Depression

Governments worldwide need to work together to implement roughly the same solutions at about the same time, or financial companies may move their operations to the countries with the least stringent rules, regulators said in interviews.

To be sure, restructuring in the U.S. during the Great Depression came together years after the 1929 stock market crash. Congress took until 1933 to create the Federal Deposit Insurance Corp. and 1934 to establish the Securities and Exchange Commission. Now lawmakers are attempting to reverse three decades of deregulation.

“This is one time when you hope they move slowly,” said Bert Ely, the head of Ely & Co., a bank consulting firm in Alexandria, Virginia, in an interview.

Protecting the economy from another catastrophe is important enough for lawmakers to take their time, said Ely, an adjunct scholar at the Cato Institute, a Washington research group, who has testified before Congress.

“You’ve got to get it right the first time,” he said.

HSBC’s Green

New regulations might slow economic expansion, according to Stephen Green, chairman of London-based HSBC Holdings Plc.

“If all of the measures currently under discussion with regard to strengthening the financial system came in their most extreme form and all too quickly, there is no question in my mind that this would damage the recovery,” Green said in a Nov. 17 speech in London.

The countries belonging to the Basel committee will probably agree next year on tougher capital, liquidity and leverage requirements for banks, members said. Implementation will take longer and depend on economic recovery, they said.

The measures would substantially increase amounts that banks have to set aside against emergencies, potentially reducing their lending ability, according to Josef Ackermann, chief executive of Frankfurt-based Deutsche Bank AG.

Antitrust regulators forced asset sales at bailed-out companies, such as the U.K.’s Lloyds Banking Group Plc and Germany’s Commerzbank AG. Still, European banks are emerging from the credit crisis bigger than before, according to data compiled by Bloomberg. The data show European bank assets grew 25 percent since January 2007, compared with a 20 percent rise at U.S. lenders.

‘It’s Insanity’

Four U.S. institutions -- Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup -- held 35 percent of the country’s deposits on June 30, compared with 28 percent by the four biggest two years before, according to the FDIC and the Fed. The world’s 10 largest banks at the end of 2008 had 26 percent of the assets of the top 1,500 banks, up from 18 percent in 1999, Bloomberg data show.

“It’s insanity that the too-big-to-fail institutions are even bigger today than they were,” said U.S. Senator Bernie Sanders, a Vermont independent, in an interview. “God forbid we have another financial crisis.”

Governments should separate deposit-taking banks from those that use their own money to trade and issue securities, said Irving Kahn, 103, who has worked on Wall Street since 1928.

Reed’s Apology

“I wouldn’t lend you a dime if I knew you loved to gamble at a casino,” said Kahn, the chairman of investment advisers Kahn Brothers Group Inc., in an interview.

John S. Reed, the former co-chief executive officer of Citigroup Inc., regrets helping to engineer the merger that created the bank, he said. Citigroup, which took $45 billion in U.S. aid under the Troubled Asset Relief Program, said yesterday that it will repay $20 billion.

“I’m sorry,” Reed, 70, said in an interview. U.S. lawmakers were wrong in 1999 to repeal the Depression-era Glass- Steagall Act, he said. The act required the separation of institutions involved in capital markets from those engaged primarily in traditional customer services, such as taking deposits and making loans.

Resurrecting Glass-Steagall would reduce the need for the taxpayer bailouts that added between 9 percent and 49 percent to the profits of the 18 biggest U.S. banks in 2009, according to Dean Baker, co-director of the Center for Economic & Policy Research in Washington.

Europe’s Universal Banks

Another school of thought is that outlawing institutions of a certain size or laying down universal caps on securities trading by retail banks would be impractical, ineffectual and a potential drag on growth, politicians and regulators in charge of rule-writing in the U.S. and the EU said in interviews.

“Plenty of firms got into trouble making regular commercial loans, and plenty of firms got into trouble in market-making activities,” Fed Chairman Ben S. Bernanke, 56, told the Economic Club of New York on Nov. 16. “The separation of those two things per se would not necessarily lead to stability.”

In continental Europe, most regulators say they see little reason to break up so-called universal banks -- such as Deutsche Bank, HSBC and BNP Paribas -- largely because they have withstood turmoil. HSBC didn’t take the U.K. government’s offer for aid, and Deutsche Bank never tapped Germany’s bank-rescue fund. BNP took 5.1 billion euros as part of a program to provide funds to banks in exchange for an increase in lending. The bank raised 4.3 billion euros in a rights issue in October 2009 to reimburse the government.

Fisherman’s Patience

“The crisis didn’t come from here,” said Daniele Nouy, secretary general of the Commission Bancaire, France’s bank regulator. “We think our model, with universal banks and a single, strong regulator, works well.”

The nascent economic recovery represents a serious threat to the overhaul of financial regulation, according to Representative Brad Miller, a North Carolina Democrat on the House Financial Services Committee.

“My greatest fear for the last year has been an economic collapse as bad as the Great Depression,” Miller said in an interview. “My second greatest fear was that the economy would stabilize and begin to recover and the financial industry would have the clout to defeat the fundamental reforms that our nation desperately needs. My greatest fear seems less likely, lately, but my second greatest fear seems more likely every day.”

With a fisherman’s patience, Volcker said he may eventually get his way on financial regulation. He took a break from his efforts in July, fly-fishing in New Brunswick’s Restigouche River. He landed a 28-pound Atlantic salmon, according to his staff.

“I’m not alone in this,” Volcker said at the Dec. 8 conference. “I think I’m probably going to win in the end.”

To contact the reporters on this story: Gadi Dechter in Washington at gdechter@bloomberg.netAlan Katz in Paris at akatz5@bloomberg.net .

Tuesday, December 1, 2009

Buyers Take a Pass on Some Failed Banks

NOVEMBER 30, 2009, 4:04 P.M. ET

By MATTHIAS RIEKER, Wall Street Journal

People's United Financial Inc. wanted to buy failed banks on the cheap. Instead, it struck a deal to buy a healthy equipment-leasing company.

Last Monday's change of plans by the Bridgeport, Conn., bank-holding company underscores a problem with the growing pile of terminally ill U.S. banks being wrestled with by the Federal Deposit Insurance Corp.

Some are in such bad shape that potential buyers won't touch them at any price, even if the government agrees to eat losses on the failed bank's bad loans. In addition to their depleted capital, many seized banks operate in areas with sluggish growth prospects, are puny and are loaded with expensive deposits gathered through brokers that are likely to leave when the acquiring bank reins in interest rates, some bankers complain.

Philip Sherringham, chief executive of People's United, said it is getting harder to find the dream deal that bank officials hoped to hatch from a wrecked bank. The supply of ideal targets—sensible deposit-gatherers that fatally "overextended" their loan portfolio—is slim and the competition fierce, he said.

The company's roots go back to 1842. Its biggest deal was the 2008 purchase of Chittenden Corp., including six banks owned by the Burlington, Vt., company. The financial crisis has given People's United an appetite for dying banks that nevertheless might have some valuable pieces.

But of the 124 banks to fail so far this year, many of those put up for sale by regulators as part of the seizure process "are of very poor quality," said Norm Skalicky, chief executive of Stearns Financial Services Inc. "It's not as if you can walk in and you are in business."

The St. Cloud, Minn., bank has bought five failed banks since the financial crisis erupted, including two in Florida and one in Atlanta, where soured real-estate loans are piling up and deposits are expensive.

Fifth Third Bancorp CEO Kevin Kabat complained at an investor conference recently that the "relative quality…of available FDIC transactions have really not been very attractive from our perspective."

The Cincinnati bank bought failed Freedom Bank of Brandenton, Fla., in October 2008 and is looking mostly for FDIC-arranged deals in geographic areas where Fifth Third already has branches.

Sluggish interest in doomed banks could push the FDIC's losses higher at a time when the agency's fund to shield depositors is in negative territory for just the second time in its history.

Kevin L. Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP, said FDIC officials might be forced to bundle some small banks together in order to lure potential buyers.

An FDIC spokesman said the agency isn't having trouble lining up buyers. About 95% of banks seized by regulators have been sold. While some attract few bids, the FDIC has "had tremendous success in finding buyers," the spokesman said. Two of the nine banks that failed this month were sold without loss-sharing agreements.

People's United, the largest bank based in New England, has been hunting all over the U.S. for attractive acquisition targets. The bank has relatively few problems compared to the overall banking industry and $2.6 billion in capital to spend.

Last month, regulators notified People's United that its bid for FBOP Corp., the battered Illinois owner of nine banks, wasn't chosen by the government, according to people familiar with the matter.

U.S. Bancorp bought the banks and reopened the branches as part of the Minneapolis-based regional bank.

Financial Federal Corp., the leasing company that People's United agreed to buy in a stock-and-cash deal valued at $738 million, is a move to expand some loan businesses rather than gain more overall heft.

Still, People's United hasn't entirely soured on the bad banks being shopped around by the FDIC. "In difficult times, bad banks will fail and good banks will fail," Mr. Sherringham said in an interview.

In many cases, though, "there are fewer bidders" and "the folks that are bidding realize that," lowering their offers, said Mr. Petrasic, the banking lawyer.

As a result, said Kip A. Weissman, a partner at Luse Gorman Pomerenk & Schick PC, there are "probably going to be more liquidations and high-loss deals."

Write to Matthias Rieker at matthias.rieker@dowjones.com