Friday, August 20, 2010

Saving the Controversial Community Bank

AUGUST 20, 2010

ShoreBank Managers Ready if Seized

Chicago Bank with Obama Ties Could Be Closed by FDIC; Executives Could Buy Some Assets

By DAN FITZPATRICK and ROBIN SIDEL, Wall Street Journal


The management team of ShoreBank Corp., the troubled Chicago community lender with ties to the Obama administration, now has enough backing to buy certain assets if the institution is seized by regulators as early as Friday, said people familiar with the situation.

A consortium of the biggest U.S. banks has agreed to support the bid with $125 million to $150 million, these people said. If ShoreBank is closed, the Federal Deposit Insurance Corp. would strip out the bad loans and sell the clean assets to the bank-backed management team. While not final, the deal is "close to fruition" and could be set as early as Friday, one of these people said.

It isn't clear at this point if there any other bidders. The FDIC typically solicits interests from as many parties as possible when an institution goes under.

An FDIC spokesman said, "We can't comment on open and operating institutions."

The banks involved in the management bid are many of the same institutions that agreed earlier this year to help fill a capital hole at ShoreBank, and they include Bank of America Corp., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, said people familiar with the situation. The banks would use those same funds, now in escrow, to back the new management-led bid.

A spokesman for ShoreBank declined to comment.

An earlier rescue attempt fell apart when ShoreBank officials were unable to secure an additional $75 million in federal support via the Troubled Asset Relief Program. A Federal Reserve analysis showed that Shore would be insufficiently capitalized even with a new capital injection, said people familiar with the situation.

One reason why some big banks are still involved is that the cost of an outright ShoreBank failure with no buyer would be greater than their investment, said one person familiar with the situation. The FDIC assesses all U.S. banks for its fund used to clean up bank seizures.

The banks involved also can potentially sell their stakes at some future point, this person said.

But the new attempt by management to gain control of certain ShoreBank assets out of receivership puts the FDIC in a tough spot.

It isn't typical for the agency to hand control of a failed institution to the same officers who led it prior to seizure. In fact, FDIC rules bar investors who hold 10% of the bank from bidding on it once it goes into receivership, according to Atlanta banking lawyer Chip MacDonald.

When determining whether a bidder is eligible to purchase assets out of receivership, the FDIC asks whether any member of the team "has ever been an officer or director of a failed institution" and has "participated in a material way in one or more transactions that caused a substantial loss to any such failed institution," according to an FDIC document.

The current management team at ShoreBank is relatively new. After regulators ordered the bank last year to raise its capital levels significantly, the company installed George Surgeon as chief executive and former First Chicago Corp. vice chairman David Vitale as a new director to deal with the regulatory demands. ShoreBank historically has served low-income and moderate-income communities and got into trouble by making bad loans to borrowers in neighborhoods away from its historical roots on Chicago's South Side.

The bank lost $39.5 million in the second quarter of 2010, according to a document filed with the FDIC.

A potential rescue of ShoreBank has been complicated by calls for inquiries into the assistance offered by the nation's largest banks. Republican lawmakers have questioned whether the Obama administration pressured the big banks for help. The White House has said it didn't pressure the lenders.

Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com and Robin Sidel at robin.sidel@wsj.com