BankUnited goes bust and is replaced by BankUnited

I was heading to dinner with Marshall Auerback when the news of the BankUnited bust came into my inbox. I see this as fairly big new for what it represents. We are witnessing a sea change in how FDIC seizures are done here with private equity companies ready to get in on the profits. Let me share the FDIC press release with you and what I believe it means. I have highlighted the interesting bits.

BankUnited, a newly chartered federal savings bank, acquired the banking operations, including all of the nonbrokered deposits, of BankUnited, FSB, Coral Gables, Florida, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). As a result of this transaction, BankUnited, FSB, offices and branches will be operated as BankUnited offices and branches.

BankUnited’s 86 offices will be open tomorrow during normal business hours. BankUnited, the successor institution, will be the largest independent bank in Florida, as was its predecessor (BankUnited, FSB). The management team is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank.

Deposits will be insured by the FDIC. Customers can continue to use BankUnited, FSB’s checks, ATM cards and debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

Bank United, FSB had assets of $12.80 billion and deposits of $8.6 billion as of May 2, 2009. The new BankUnited will assume $12.7 billion in assets and $8.3 billion in nonbrokered deposits. The FDIC and BankUnited entered into a loss-share transaction and will share in the losses on approximately $10.7 billion in assets covered under the agreement. The loss-sharing arrangement is projected to maximize returns on the covered assets by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship. BankUnited will recapitalize the institution with $900 million in new capital.

BankUnited will not assume the approximately $348 million in brokered deposits. The FDIC will pay the brokers directly. Customers who placed money with brokers should contact them directly for more information about the status of their deposits.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-451-1093. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Friday from 8:00 a.m. to 8:00 p.m., EDT; on Saturday from 9:00 a.m. to 6:00 p.m. EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties can also visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/bankunited.html.

The FDIC facilitated the transaction with John Kanas and a consortium of investors after BankUnited, FSB, was closed today by the Office of Thrift Supervision, which appointed the FDIC as receiver. The FDIC estimates that the cost to its Deposit Insurance Fund will be $4.9 billion. BankUnited’s acquisition of all the deposits and assets of BankUnited, FSB was the “least costly” resolution for the DIF compared to alternatives.

In addition to the management team led by John Kanas, ownership includes WL Ross & Co. LLC; Carlyle Investment Management L.L.C.; Blackstone Capital Partners V L.P.; Centerbridge Capital Partners, L.P. LeFrak Organization, Inc; The Wellcome Trust; Greenaap Investments Ltd.; and East Rock Endowment Fund.

Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments. In the near future, the FDIC will provide generally applicable policy guidance on eligibility and other terms and conditions for such investments to guide potential investors.

BankUnited, FSB is the 34th FDIC-insured institution to fail in the nation this year, and the third in Florida. The last bank to be closed in the state was Riverside Bank of the Gulf Coast, Cape Coral on February 13, 2009.

This is a completely new model of FDIC seizure.  In essence, we have seen the creation of a new bank, capitalized with $900 million of new money.  The assets have already ready been cleansed by the FDIC seizure, so you get good assets, a huge lending spread and an existing infrastructure and installed customer base.  What’s not to like about this.  If you had $900 million, you would invest in this scheme as well. I imagine the private equity guys will hold this investment for a few years and sell it into the market at an enormous gain.

Notice the names involved: Wilbur Ross, Carlyle, Blackstone.  You should also notice that next to last paragraph I highlighted:  this is only the beginning.  Private equity is going to be investing in new banks from FDIC seizures in a major way going forward.  The FDIC can now seize bankrupt institutions and offload them to investors who will “will share in the losses” and keep all the gains for themselves.  Obviously, we don’t have a copy of the loss-share agreement, but you can bet it is going to be pretty favourable to the investors.

In my view, this arrangement presents yet another reason why the banking sector is no longer in freefall and why you are going to see the economy stabilize in due course.

9 Comments
  1. Manshu says

    Very interesting, so the coming of private money shows that there is no more need for PPIP, TALF and such?

  2. Tom Lindmark says

    Ed,

    There are a lot of things to be concerned about in this transaction. If you look at the manner in which the acquiring companies bought the company you will note that it is artfully arranged to stay below the 25% bogey that would subject them to regulation by the Fed. The Fed has said that these sorts of structures an artifice.

    You may be correct in your assumption that they plan to hold and sell in a few years. They may, however, have other designs. The idea that private equity firms have access to what amounts to their own piggy bank with which to fund deals.

    You might want to review John Hempton’s post on the J.C. Flowers acquisition of a Japanese bank. Here is the link http://brontecapital.blogspot.com/2009/05/christopher-flowers-short-memory.html

    Personally, I think that the FDIC jumped the gun entirely in this case. I believe there were other bids including one from Toronto Dominion. I think it would be worthwhile to see the details of all of the bids and to hear an explanation from the FDIC as to why they chose to sell to private equity as opposed to another financial institution (the generally preferred option). I also think that there ought to be a very deep policy discussion about commercial companies owning banks.

    Isn’t it amazing how quickly so many have gone to arguing in favor of nationalization and downsizing the banks to barely blinking when the most agressive part of the financial system acquires a bank?

    1. Edward Harrison says

      Tom, I like your interpretation of the use of the monies. I saw the dust-up over Shinsei. That has left the Japanese with a fairly bad taste in their mouths regarding American style capitalism.

      You should also note that the $5 billion loss and the subsequent acquisition under the same name could be seen as a hidden subsidy. It is as if the private equity guys just received BankUnited free and clear minus a $4.9 billion hit taken by taxpayers. Nothing else has changed at the company except top level management.

      I am surprised no one has picked up on this.

  3. Rita says

    I disagree with your conclusion. I think this represents the further deconstruction of America and its financial system. Just take a look at what the vultures over at Cerebus did for GMAC and Chrysler. These acquisitions made by Private Equity firms will be gutted and hollowed out for short term gain and then thrown back to the FDIC and taxpayers in the end. Financial Terrorism for one and all

    1. Edward Harrison says

      Rita, the difference between GMAC/Chrysler and this BankUnited transaction is timing: top of the market versus after a considerable bust and bankruptcy. The economics of the deals are vastly different as a result.

  4. JOHNQ says

    NEW MGMT TEAM AN OWNERS OF BANKUNITED ARE LAUGHING ALL THE WAY TO THE BANK. THEY BOUGHT THE BANK FOR 900 MLLION AND ARE GUARENTEED A RETUEN OF 4.9 BILLION OVER THE NEXT 2 YEARS BY MAXIMIZING THE LOSS SHARRE AGREEMENT, MEANING THEY ARE BETTER OF ALLOWING ABOUT 6 BILLION IN LOANS GO BAD, AND THUS NO INTEREST IN HELPING THE CUSTOMERS. MORE FORECLOSURES, THEY WILL BULK SALE THE PROPERTIES TO THEIR BUDDIES, AND GET RICH DOING IT. WHAT A RIP-OFF, WHAT IS THE FDIC DOING, PVT EQUITY FIRMS SHOULD NOT OWN BANKS.

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