Thursday, November 11, 2010

Felix Salmon: When bankers make windfall profits from the FDIC

NOV 11, 2010 09:28 EST

Felix Salmon

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.