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The New M&A Introduction

The banking industry is in the midst of a consolidation phase that is likely to reduce the number of banks by at least 25 percent before the end of the decade. This consolidation will be realized due to the number of failed banks taken over by the FDIC, sold by the FDIC, and by merger and acquirisition of troubled institutions. Bank merger and acquisition activity will rise to record levels during 2010 -2011. The banking industry is undergoing a restructuring and an major exodus back to community banking principles coupled with associated risk management maxims.

The number of failed banks is likely to exceed 500 between 2010-2011 alone. This presents an opportunity to acquire banks at such an undervaluation as to be almost a steal. Banks deposits are selling at a premium of 0 – 1.5%. Assets maybe cherry picked and insured by the FDIC under an 80/20 Loss Share Agreement. Recent acquisitions have proven that banks may be purchased for pennies on the dollar, with the net result of deposit increases of 75% +, asset increases of 50% +, increase in offices/branches of 40%+ and immediate market share at the stroke of a pen.

Enclosed are only a few related banking articles in which the reader will see the validity of the aforementioned introductory statements. The opportunity is now and on a diminishing timeline of opportunity. A number of the articles will define the opportunity, reinforce the opportunity, present the players/investors and provide keen insight.

The New M&A Introduction

The banking industry is in the midst of a major consolidation phase that is likely to reduce the number of banks by at least 25 percent between 2009-2015. This consolidation will be realized due to the number of failed banks taken over by the FDIC, sold by the FDIC, and by merger and acquirisition of troubled institutions. Bank merger and acquisition activity will rise to record levels during 2010 -2011. The banking industry is undergoing a restructuring and a major exodus back to community banking models coupled with associated conservative risk management maxims.

The number of failed banks is likely to exceed 500 between 2010-2011 alone. This presents an opportunity to acquire banks at such an undervaluation as to be almost a steal. Banks deposits are selling at a premium of 0 – 1.5%. Assets maybe cherry picked and insured by the FDIC under an 80/20 Loss Share Agreement. Recent acquisitions have proven that banks may be purchased for pennies on the dollar, with the net result of deposit increases of 75% +, asset increases of 50% +, increase in offices/branches of 40%+ and immediate market share at the stroke of a pen.

Enclosed are only a few related banking articles in which the reader will see the validity of the aforementioned introductory statements. The opportunity is now and on a diminishing timeline of opportunity. A number of the articles will define the opportunity, reinforce the opportunity, present the players/investors and provide keen insight.

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INDEX

Article 1:Florida Deal a Microcosm of New M&A -American Banker 12/10/09 -Page 4

Article 2: AmTrust reopens, name unchanged -Ackron Beacon Journal 12/06/09- Page 7 Article 3: Prepping for The Weekend: Buying Banks from the FDIC -BAI 12/01/09-Page 9 Article 4: Multiple Charters Under More Pressure-American Banker 11/23/09-Page 12

Article 5: Texas billionaire trolling for failed Florida Banks-Herald Tribune 11/21/09- Page 14 Article 6:Banking woes seen by La. Company as opportunity-AP 11/19/09-Page 16

Article 7: This bank is suddenly a player in Florida-Herald Tribune 11/18/09-Page 18

Article 8: FDIC Board Adopts Proposed Interim Final Rule To Provide A Transitional Safe Harbor For All Participations And Securitizations FDIC Press Release 11/13/09- Page 20

Article 9: Robust M&A activity lies ahead, but FDIC deals are near-term focus Bank & Thrift 11/13/09- Page 21

Article 10: Remarks by FDIC Chairman Sheila Bair at the Institute of International Bankers Conference; New York, NY-FDIC Press Release 11/10/09- Page 23

Article 11:Small Banks Dip Toes into IPO Waters -AmericanBanker 10/24/09Page 29

Article 12: Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on Examining the State of the Banking Industry before the Subcommittee on Financial Institutions, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Room 538, Dirksen Senate Office Building FDIC Press Release 10/19/09- Page 31

Article 13: Bank failures create regional winners-Market Watch 10/16/09-Page 41 Article 14: FDIC Approves Rules for Private Equity Buying Banks Private Equity Council 10/12/09- Page 44 Article 15: Firms poised to bet billions on real estate-Herald Tribune10/12/09Page 46 Article 16: Man on a Mission -US Banker 10/10/09- Page 51

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Article 17: Ross Gets Nod for a Bank Charter-Wall Street Journal 9/11/09-Page 55 Article 18: The FDIC's Statement Of Policy On Qualifications For Failed Bank Acquisitions-Cadwalader, Wickersham & Taft LLP 8/13/09- Page 58

Article 19: Preparing for a major bank shakeout-CNN Money 8/28/09-Page 66

Article 20 & 21: FDIC soften bank investment restrictions & FDIC to soften stance, luring private capital -Reuters 8/26/09-Pages 69 & 70

Article 22: FDIC may ease private equity buys of failed banks-AP 8/20/09-Page 73

Article 23: FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank Acquisitions-FDIC Press Release 7/2/09-Page 75

Article 24: Psst! Wanna own a bit of a failed bank?-CNN Money 6/30/09-Page 77

Article 25:Treasury’s Bill Gross on Speed Dial-Wallstreet Journal 6/20/09-Page 82

Article 26: Banking on opportunity-Boston Globe 5/08/09-Page -98

Article 27: Planning and Executing a Successful Troubled Bank Acquisition Western Independent Bankers 4/01/09- Page 100

Article 28: How Many to Fail; Do We Hear 1,000?-American Banker 3/24/09- Page 103

Article 29: Carlyle Group Said to Raise $1 Billion to Buy Stakes in Banks-Bloomberg 2/15/09 Page 106

Article 30: Failed banks for sale...who's buying?-CNN Money 12/19/08-Page 108

Article 31: Insiders Reap Huge Profits on Purchase of Failed South Carolina Bank-Problem Bank List-Page 111-113

Article 32: Bank big shots eying Ga. apply to start bank in Fla.-Tampa Bay Journal-April 9, 2010-Page 115-116

Article 33: A rush to buy failed Florida banks: Miami Herald-04-10-2010

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December 10, 2009

Florida Deal a Microcosm of New M&A

By Marissa Fajt

When a group of would-be bank organizers recently landed a small Florida institution, they were foreshadowing the near-term future of industry M&A.

Frustrated by a wait for a charter, Apollo Bancshares went hunting for a small bank in its target market of south Florida. It found such a launch vehicle in Miami, where Union Credit Bank was willing to give up a controlling stake in return for a recapitalization. Apollo agreed to buy that stake in the $154 million-asset Union Credit for $15 million.

The Apollo team had formed early last year to start a south Florida bank from scratch and applied for a license in mid-2008. But federal regulators made obtaining deposit insurance too difficult, and in March of this year Apollo started shopping for small acquisitions.

"The opportunity changed - the de novo scenario became less attractive. To work with the regulatory process was longer, which meant more expensive, and the requirements laid out once we open were a lot more complicated and going to affect our investment. The opportunity to acquire a bank became more attractive," said Eduardo Arriola, Apollo's chairman and chief executive.

Industry watchers said they expect more of the same in the coming year.

"We are not going to see a lot of traditional M&A," said Rusty LaForge, a lawyer at McAfee & Taft in Oklahoma City.

"As bank failures come along, we are going to see traditional buyers are going to sit and watch for those failures," LaForge said.

"But these organizing groups can't get into a failure as easily, and those organizing groups know they can't get FDIC approval for new insurance. So they are who we see buying banks. That is their only way to get a hold of a charter, and I don't see anything that would cause it to change for next year."

As for true start-ups, "I think they are going to get to the point that I doubt we see any in the next year," said Byron Richardson, the president and CEO of Bank Resources Inc., a consulting and investment banking firm in Atlanta.

"If you see one or two new banks in the coming year, they will be the exceptions. More often, individuals who want to get into the banking business are going to buy control or 100% of existing banks."

Usually these erstwhile start-ups look for targets with few credit problems, investment bankers said.

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"They tell us, 'We want the smallest, cleanest bank you can sell us,' " said Wes Brown, a managing director for St. Charles Capital in Denver.

The smaller the bank, he noted, the less risk associated with the loan portfolio that is acquired with it.

"They are willing to pay a premium for that. They plan to branch from that initial market into their market. Generally, they want to buy a bank in the state they are going to operate in, but not necessarily in the area they are going to operate in."

Union Credit, founded in 2001, may have been the cleanest bank Apollo could find, given that it was looking in troubled Florida. But the bank is not quite pristine. Its net loss swelled to $3.8 million in the third quarter from $94,000 a year earlier.

Union Credit's total risk-based capital ratio dropped over the same period from 21.59% to 9.55% - 45 basis points below the threshold regulators consider well capitalized.

Nonperforming loans jumped from 1.81% of the bank's portfolio to 6.88%. The average for Florida banks with assets of $100 million to $300 million was 6.04% at the end of the third quarter.

Arriola said Apollo talked to more than 30 banks in the southern Florida market that were interested in selling, before deciding on Union Credit.

"They weren't truly a troubled bank," he said. "They weren't on the FDIC watch list. The capital came down, but it was a yellow light, not a red light. They had just come under the well-capitalized ratio ... and our coming in with capital addresses that immediately."

Around the country, other organizing groups have been making decisions similar to the one the Apollo group made. For example, organizers of what would have been the biggest start-up bank in Virginia, Xenith Corp. in Richmond, struck a deal instead in May to acquire the $175 million-asset First Bankshares Inc. in Suffolk, Va., after they couldn't get over regulatory obstacles. And AustinBancshares Inc. agreed to buy La Grange Bancshares Inc., the parent of the $29 million-asset Colorado Valley Bank, for similar reasons.

Roughly 25 banks have opened this year, versus 95 in 2008, according to Federal data.

(The agency has repeatedly said there is no moratorium, formal or otherwise, on new deposit insurance.)

Overall, bank merger and acquisition activity has also slowed considerably this year.

According to the investment bank Carson Medlin Co., 139 bank deals have been announced this year, down from 179 in all of last year and 322 in 2007. (The tally includes recapitalizations and excludes deals that were later canceled.)

Recapitalizations are hardly confined to Union Credit or south Florida - or to investors that shelved start-up plans.

Other recent examples include a $40 million infusion that a group of private-equity firms made in Three Shores Bancorp., the parent company of Seaside National Bank and Trust in

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Orlando, in central Florida; and Ohio Legacy Corp.'s deal to sell a majority stake to Excel Financial LLC for $15 million.

Besides returning Union Credit to well-capitalized status, its seller, a wealthy Chilean family, also wanted to find a partner so it could resume growth after several years of stagnation, Arriola said.

The deal was announced last week and is expected to close in the first quarter.

Charlie Crowley, a managing director in investment banking at Stifel, Nicolaus & Co. Inc., said there was a similar lull in traditional M&A during the savings and loan crisis in the late 1980s and early 1990s.

A rebound followed, and the same could happen after this slow period, Crowley said. "What we saw 20 years ago is once the FDIC had done a fair amount of the cleanup and after the healthier part of the industry became stronger, there was a little bit of pent-up demand among both buyers and sellers, and that led to a fairly prolonged period of M&A activity," he said. "We wouldn't be surprised to see that again, but it will be a while."

Before M&A activity picks up, Crowley said, bank valuations will have to increase - both for the stock that buyers use as currency and the prices sellers expect.

Also, overall confidence in loan portfolios will need to improve before buyers are willing to take on other companies' loans, Crowley said.

"It is better than it was six or nine months ago, but we still need a fair deal of healing in the real estate environment and the industry, and then it will pick up a lot," he said.

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AmTrust reopens, name unchanged

New ownership says Cleveland headquarters, all 66 branches still in business. Employees stay By Teresa Dixon Murray

Plain Dealer Reporter Published on Sunday, Dec 06, 2009

The new owners of AmTrust Bank plan to keep all branches open with the same name and employees and the Cleveland headquarters.

AmTrust Bank, which opened with one office on Valentine's Day 120 years ago and grew to one of the nation's 100 largest banks, was seized by federal regulators Friday and bought by New York Community Bank of Westbury, N.Y.

Branches reopened on Saturday.

New York Community Bank Chairman and Chief Executive Joseph Ficalora said in an interview that the bank plans to keep all 66 AmTrust branches open, keep the Cleveland headquarters and keep all the branch employees, at least for the foreseeable future.

''We have a great deal of confidence in the people who've been doing the job,'' Ficalora said. ''We are definitely interested in working with them to make the bank the larger bank it once was.''

Branch employees are critical, he said. ''The thing we most appreciate is the relationship that's established'' between customers and employees they know. As for management, ''those decisions will be made person-by-person,'' he said.

New York Community Bank also plans to keep the AmTrust name. The bank will be known as AmTrust, a division of NYCB.

AmTrust is the first Northeast Ohio bank to fail since TransOhio Federal Savings Bank of Cleveland was seized 17 years ago. AmTrust, the latest calamity in the nation's two-year-old banking crisis, became the 128th bank to fail this year, and the second in Ohio. Six banks in all failed Friday, bringing the year's total to 130. With assets of $12 billion, AmTrust was the fourth-largest to fail this year.

New York Community Bank, one of the nation's 25 largest banks and one of its strongest, paid nothing to take over AmTrust's $8 billion in deposits, which indicates AmTrust was essentially worth nothing, analysts said. About 77 percent of the privately owned bank was held by the Goldberg family, which had controlled it for nearly five decades.

While the closure is not surprising — given the parent company's bankruptcy filing last week — it is still stunning to the bank's 280,000 local customers, 1,400 local employees and a community that had watched the sleepy thrift become a national powerhouse and an important philanthropic force across Northeast Ohio.

For most customers, there's no issue in the short term. ''Depositors are not losing a penny,'' said FDIC spokesman David Barr.

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Customers can access the money in their accounts as usual through ATM/debit cards or by writing checks in the branches. Direct deposits and payments already scheduled will continue as if nothing had changed. Customers who have questions can call the FDIC toll-free at 1-800-450-5143 from noon to 6 p.m. today.

The main group who will be affected are those who had loan applications in process. They could get stalled or canceled.

While depositors aren't losing anything, the FDIC fund is taking an estimated $2 billion hit, Barr said. The FDIC entered into an agreement to cap New York Community Bank's potential losses on the loans it's buying. NYCB agreed to buy about $9 billion in AmTrust assets. The FDIC will keep the remaining $3 billion in loans to sell later.

Among the nation's 8,100 banks, AmTrust was the 92nd largest as of June 30. At its height, it was the 68th largest in 2006 and 2007. In the last two years it's lost nearly 40 percent of its assets and deposits as its loans lost value, CDs matured and customers left. AmTrust was simply into mortgage lending too deep, much of it risky or in markets that were about to implode.

''It's a terribly tragic situation but they weren't alone in the problem,'' said Karen Hopper Wruck, a finance and banking professor at the Ohio State University's Fisher College of Business.

AmTrust's failure follows its financial report two weeks ago that showed the bank was spiraling toward insolvency. The bank's parent company, AmTrust Financial Corp., filed for bankruptcy on Monday. The bank was not included because banks can't file for bankruptcy protection.

Banking analyst Terry McEvoy of Oppenheimer & Co. in Maine said NYCB is a bit of a surprise because the bank had no presence in Ohio, Florida or Arizona, the three markets where AmTrust has branches. But he said NYCB is ''highly regarded.''

AmTrust has 25 branches in Cleveland and Akron, 25 in Florida and 16 in Arizona.

Michael Van Buskirk, president and CEO of the Ohio Bankers League, an industry trade group, said it's better for the region that AmTrust was bought by a bank with no local presence. The purchase by a bank with existing branches might have meant big losses in jobs and branches. ''I think this is a positive for Cleveland.''

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Prepping for The Weekend: Buying Banks from the FDIC Buying failed banks from the regulators can bring growth at a cheap price – but only if acquirers do their homework first. BY SHAHAB CHOUDHRY AND CHRISTOPHER P. TERILLI BAI BANKING STEATEGIES Dec 1, 2009

There has never been a better time for growth-hungry banks to find bargains. That’s a fact. Failing banks abound, and some once-active acquirers are pushing back from the table, leaving the Federal Deposit Insurance Corp. (FDIC) in a bargaining mood.

But here’s another fact: with the oversupply of distressed banks, there has never been a better time for caveat emptor. While failed banks may tantalize with attractive price tags, buyers also need to see the failed institution behind the paint job. These banks are failures because they have things wrong with them. And that makes them risky.

On the other hand, the FDIC is eager to price accordingly and mitigate the risk via loss-share agreements and good asset/bad asset separations. So how does a prudent bank look over the landscape, identify valuable assets at great prices and prepare to participate wisely and confidently in the bidding process?

Many healthy banks can rightly claim to be M&A experts after decades of participating in the industry’s consolidation, successfully integrating one acquisition after another. How different can an FDIC-assisted transaction be?

The answer lies in the FDIC’s own charter: Restore public confidence… Promote the safety and soundness of the nation’s banking system…. What we call an acquisition, the FDIC calls a “divestiture.” Its divestiture process, like its seizure process, is geared to bolstering public confidence. The agency needs to be confident that each divestiture fulfills the spirit of its charter and produces a healthy institution.

Keeping those points in mind, we recommend that banks entering into FDIC-assisted transactions embrace a three-part approach:

1. Put “resourceful” in front of “due diligence.”

For traditional acquisitions, bank acquirers have developed a crisp and thorough expertise in due diligence. They know what to ask, where to find the answers and how to analyze the information. They take the time to go to the source, get the right data and validate it.

In an FDIC divestiture, by contrast, acquirers receive slim packets of distilled data about the target; they are not allowed to contact the failing bank for additional information. This leaves prospective acquirers with myriad questions and no traditional avenues for getting them answered. What customer strategy has this bank pursued? What was their pricing strategy? How much customer traffic do they get at their branches? What is their corporate culture? Why do people bank with them? Have they been losing or gaining customers recently?

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And then there’s the ultimate question that is absolutely core to any prudent decision: Why did this institution fail?

Resourceful due diligence means finding novel ways of getting those questions answered. Secrecy and discretion are paramount, ruling out most ordinary research via conversations with the failed bank’s competitors, customers, vendors and others familiar with the target bank. Instead, acquirers must be resourceful in seeking out available existing data and research on real estate, demographics, market economics, etc. For example, to gain added insight into the make-up of the customer base, it is helpful to tap the local newspapers for historical research on the bank’s marketing and advertising campaigns. The failed bank’s servicer can also be a source of detailed information, often at a price.

2. Have a Great Weekend. Caveat emptor or not, FDIC divestitures usually allow prospective acquirers less than 30 days to prepare their bids, a breathtaking pace even for experienced acquirers whose well-oiled M&A machines can make quick work of traditional acquisitions. Traditional acquirers can also, if business or technical conditions allow, delay a conversion date to effect the cleanest conversion possible with minimal customer impact. It is not unusual for a conversion of bank systems to take place a full year after an announcement.

But for the FDIC, speed and customer impact go hand-in-hand. The faster the customer can become a customer of a real bank rather than the FDIC, the faster confidence is restored. This imperative usually rules out a methodical assessment of resources, systems and products. It also rules out the traditional staged communications plans carefully calibrated by acquirers to soothe employees and shareholders of the acquired institution.

Instead, it’s all about The Weekend. Between the Friday announcement of the seizure and the failed bank’s reopening on Monday morning under new ownership, an extraordinary number of decisions must be made and executed, among them a communications plan designed to instill public and customer confidence. The last thing the acquirer or the FDIC wants to see on Monday is a line of customers anxious to move their accounts to a “safer” bank. If the public is not confident, the FDIC’s mission fails. If customers depart in droves, the acquirer’s mission fails.

No surprise that the FDIC’s normal interest in a speedy turnover has been heightened lately. As of this writing, regulators have seized 98 banks this year, with new failures announced every Friday. No one sees this trend abating. Having already had to raise premiums and impose a special assessment on its members to pay off depositors, the FDIC cannot afford to stay in the business of running failed banks any longer than is absolutely necessary. When assessing potential acquirers of failed institutions, the FDIC is certain to gauge their commitment to a rapid pace. 3. Demonstrate a new kind of M&A readiness.

This is a new field of competition, calling for a new kind of competence. Before making a bid and getting caught up in an unfamiliar process, interested banks need to revisit their current M&A readiness plans and create one geared to FDIC transactions.

Traditionally, acquirers have been at pains to show how they would treat management and employees of acquired banks, increase the bank’s value for shareholders, maintain the quality of service for customers, leverage its technology innovations and so on.

But the FDIC has three main questions: How high is your bid? Do you have the capital strength to carry it out? Can you take over and operate the failed bank on The Weekend?

Buried in the last question are the questions that top managers of prospective acquirers must ask themselves: If the deal of the century were to surface soon, are we ready to take advantage of it?

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Before we can convince the FDIC, can we convince our board – and, yes, ourselves – that we have what it takes to succeed in this high stakes business?

Can we, for example, assemble the infrastructure for servicing a sudden increase in troubled assets? Can we handle the expected customer retention challenges? Can we quickly decide whether our best strategy in a given situation is to completely integrate the failed bank, run it as a standalone or simply buy the deposits and get rid of everything else? Can we handle the added real estate challenges? Can we operate effectively in this new, fast-paced environment?

Bidders on FDIC divestitures increasingly line up partners to help them fill experience gaps and give the FDIC confidence that, when choosing a winner, they will resolve a failed bank, not create another larger problem.

Growth will never be this affordable again. The past twelve months have produced a steady accumulation of expertise on this subject. Healthy banks need not shy away because the risks are unfamiliar or because the prospect of The Weekend is daunting. For the present, at least, this is one of the most important fields of competition. The results will reshape the competitive landscape and the payoff for the winners will be long-lasting.

Mr. Choudhry is the managing partner, M&A Solutions, with Morristown, N.J.-based Collabera Inc. and can be reached at shahab.choudhry@collabera.com. Mr. Terilli is the vice president, professional services, with Quincy, Mass.-based ADS Financial Services and can be reached at christopher.terilli@adsfs.com.

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November 23, 2009 By Paul Davis Multiple Charters Under More Pressure

The decentralized banking model, which has been losing favor for years, may be killed off by regulatory reform.

Leaving decisions to local executives who knew their markets, the thinking went, would allow big lenders to be nimble and small ones to grow. But a stricter, more streamlined regulatory system and second-guessing of the credit-granting processes are forcing change.

Executives at companies such as Fulton Financial Corp. and Synovus Financial Corp. say they have not given up on their longtime models, but many say the strategy of using lots of charters and letting front-line managers make tough decisions might become another casualty of the financial crisis.

"The future of decentralized banking is a legitimate question," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "I don't think the model is dead, but it has been dealt a harsh blow. It will be harder to justify due to new regulatory and capital burdens."

Government responses to the crisis present the biggest challenge to decentralized models, especially legislation that would create a single bank regulator.

"If we have one monstrous regulator, there would be no point to having separate banks," Fitzsimmons said. "It raises the question of whether such a structure would be allowed."

Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., agreed.

"The biggest challenge will be on the regulatory side," he said. "It is more expensive to run a decentralized footprint."

Another strike against the model is the perception that decentralized banking may have exposed companies to more problems leading up to the financial crisis partly because of inconsistent and at times lax lending standards. Likewise, some are concerned that the model may have prevented banking companies from reacting swiftly to tackle problems.

The former GB&T Bancshares Inc. in Gainesville, Ga., reported in early 2007 that one of its bank presidents had failed to comply with a number of company policies and procedures, including collateral requirements. The president was fired and within a year GB&T sold itself to SunTrust Banks Inc.

Another mounting concern is that undercapitalized banks could offset gains at healthier affiliates, forcing companies to shift capital around or weakening the overall strength of the parent. The model received its darkest black eye earlier this month when the Federal Deposit Insurance Corp. seized the $19 billion-asset FBOP Corp. Several of the Oak Park, Ill., company's nine banks were undercapitalized, including its biggest subsidiary, California National Bank, which weighed heavily against its healthier banks. U.S. Bancorp bought all nine banks Nov. 2.

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Richard Anthony, the chairman and CEO at Synovus,, has acknowledged the Columbus, Ga., company's model may have contributed to credit problems.

"Some of the growth we had in construction and development [lending] that was more than we really wanted ... has been because of the decentralized model," he said during an August 2008 conference hosted by Keefe, Bruyette & Woods Inc.

Still, Anthony disagrees that the model kept Synovus from taking prompt action to confront issues. Local CEOs have been critical to helping Synovus identify and vet local investors interested in buying distressed real estate. Selling to local buyers has yielded pricing that on average is 30% higher than bulk sales to outsiders, according to company data.

"In some ways we did act pretty quickly," Anthony said in an interview. "Particularly in Florida, we did take some decisive action."

Capitol Bancorp Ltd. of Lansing, Mich., may be the most noticeable convert.

In March, Capitol combined nine banks in Michigan as part of a plan to spin them off into a new company, Michigan Bancorp Ltd. The move, which is still under regulatory review, would relegate about a third of Capitol's nonperforming assets to the new entity, while also slightly raising Capitol's capital levels.

Capitol has eliminated 13 charters since mid-2008, slimming to 51 charters by consolidating banks or selling them. Last week the $5.3 billion-asset company sold Bank of Santa Barbara to investors.

Synovus has shrunk to 30 charters from more than 40 in 2005. It also tightened up in recent years, implementing consistent standards and placing credit administration and senior credit officers in its worst-hit regions.

Executives who still embrace the model feel it fulfills two key objectives of banking: empowering employees and developing strong relationships with clients. "When they retain their bank's name, it sends a message from corporate that they are still in charge," said R. Scott Smith Jr., Fulton's chairman, president and CEO. "It brings responsibility and accountability."

Fulton Financial, of Lancaster, Pa., merged three of its Maryland banks this summer, leaving the $16.6 billion-asset company with eight banks.

Decentralized models can boost deposit gathering and liquidity because they can offer the $250,000 deposit insurance limit across multiple banks.

Wintrust Financial Corp. of Lake Forest, Ill., has promoted a MaxSafe money market product that allows customers to have account balances across the $12.1 billion-asset company's 15 bank charters. Anthony at Synovus said his company holds about $2 billion in pooled deposits that are held at multiple banks.

Smith said Fulton's ability to offer more deposit insurance to individual clients proved beneficial during last year's financial crisis. "It was a nice way to hold on to customers' deposits and keep them from going somewhere else," he said.

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Texas billionaire trolling for failed Florida banks

Companies are out to buy sick banks, like IberiaBank last week bought Century Bank, headquartered in downtown Sarasota.HERALD-TRIBUNE ARCHIVE / 2009 By John Hielscher

Published: Monday, November 23, 2009 at 1:00 a.m. Last Modified: Saturday, November 21, 2009 at 5:43 p.m.

A BILLIONAIRE TEXAS BANKER received swift approval from Florida banking regulators to buy

failed or ailing banks.

The Florida Office of Financial Regulation issued an emergency order this month for Andrew Beal,

giving him authority to charter a new Florida bank that would acquire failed or failing banks.

Beal is the chief executive and sole owner of Beal Financial Corp., a Plano, Texas, company that owns

Beal Banks in that state and Nevada.

Forbes magazine recently called him the 52nd richest person in America, with a net worth of $4.5

billion. He can definitely cover the tab for a few failed banks.

Beal and associate M. Molly Curl applied for a Florida bank charter on Oct. 19 and won approval on

Nov. 5, less than three weeks later. New bank charters typically take months to review and approve.

Beal was rumored to be a possible buyer of either Century Bank of Sarasota or Orion Bank of Naples,

both of which failed on Nov. 13. Those banks were sold to IberiaBank of Lafayette, La.

Beal Bank of Plano, at $2.5 billion in assets, and Beal Bank Nevada, at $5.5 billion, aren't typical

retail banks with checking and savings accounts. They are wholesale banks that buy troubled loans, at

cheap prices, from banks or regulators.

Beal isn't the only big-money name looking to make a deal on failed banks in Florida.

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Miami Dolphins owner Stephen Ross and two executives from his Related Cos. have formed a new

bank to bid on sick banks.

SJB National Bank has been approved by the Federal Deposit Insurance Corp. to bid on banking

operations of failed lenders.

High cost of Coast

First Banks Inc. bought Bradenton's Coast Bank for a bargain-basement price in late 2007, but Coast

is proving costly today.

Nearly one-fourth of the Florida mortgage portfolio First Banks acquired from Coast is delinquent or

restructured, the bank said in a regulatory filing last week.

On Sept. 30, the bank reported $29.6 million in nonaccrual loans, $7.6 million in loans 30 to 89 days

past due and $8.5 million in restructured loans.

The has bank charged off $26.5 million of the Florida loans so far this year.

First Banks, a privately held company based in suburban St. Louis, knew it was taking on problems

when it bought Coast. The Bradenton bank was near failure after loan losses depleted its capital, and it

was mired in a lending scandal involving its chief lender and a home builder. That executive, Philip

Coon, has pleaded guilty to loan fraud and is awaiting sentencing.

Foxworthy on Trust board

Ron Foxworthy has joined the board of directors of Trust Companies of America, the parent of

Caldwell Trust Co. of Venice.

He is filling the term of Jack Meyerhoff, a Caldwell Trust founder who died in September.

Foxworthy started Rusty Plumbing Inc. and operated it until 1999. He also was a residential and

commercial developer and served as a director of a number of local banks. He was a founder of The

Suncoast Foundation for Handicapped Children.

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November 19, 2009

Banking woes seen by La. company as opportunity

By ALAN SAYRE AP Business Writer

A Louisiana banking company sees the worst rash of bank failures in two decades as fertile ground to expand well beyond the state line.

Two Florida banks recently acquired by Iberiabank Corp. may be only the start for the Lafayette-based company. Analysts say the takeovers — which doubled Iberiabank's asset base — will likely be emulated by other companies as smaller banks fail and megabanks reduce their loan exposure in states with real estate problems.

So far this year, there have been 123 U.S. bank closures.

"What you're going to have is a void of decent size banks that can loan," said Michael Rose, industry analyst for Raymond James.

On Nov. 13, after the Federal Deposit Insurance Corp. shuttered Naples, Fla.-based Orion Bank and Sarasota, Fla.-based Century Bank, Iberiabank assumed $3.1 billion in assets, $2.5 billion in loans and $2.5 billion in deposits, along with 34 banking offices in six Florida metropolitan areas. Loss-share agreement with the FDIC put the company's maximum exposure at $252 million. Overnight, the company with the Louisiana name became Florida's 20th-largest bank in deposits.

During a conference call with analysts after the takeover, Iberiabank chief executive Daryl Byrd said the "right time, price and risk structure" paved the way for his company to step into Florida.

"They got to grow about 45 percent overnight. In essence, the FDIC is going to pay them to clean up these banks. It'sa low-risk proposition for shareholders," said Peyton Green, banking analyst with Sterne, Agee & Leach.

Rose said that despite recent crises with residential and commercial loans that helped sink Orion and Century Bank, Florida is likely to be a banking profit center after the recession, provided a company has capital and patience.

"Florida is a deposit-rich state," Rose said. "Demographic forecasts see larger numbers of people moving in. That could be a couple of years away, but it will be a good place to be if you are well capitalized and have good people in place."

The Florida deals, which did not require Iberiabank to raise additional capital, followed the Aug. 21 assumption of all the deposits and some of the assets of Birmingham, Ala.-based CapitalSouth Bank, which was closed by regulators. That brought 10 additional offices into the Iberiabank fold.

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Established in 1887 as the Iberia Building Association, the company went public as ISB Financial Corp. in 1995 before becoming Iberiabank Corp. in 2000. Iberiabank broke out of its Louisiana roots in 2006 with the acquisition of two Arkansas banking companies — Little Rock-based Pulaski Investment Corp. and Jonesboro-based Pocahontas Bancorp Inc.

Iberiabank now has 135 banking offices in Louisiana, Arkansas, Tennessee, Alabama, Texas and Florida, in addition to 26 title offices in Louisiana and Arkansas and mortgage representatives in 11 states.

In March, Iberiabank drew attention when it became the first bank to give back federal money from a program designed to stimulate lending during the credit crisis, saying the funding came with too many federal strings attached. The company took a $2.2 million charge to redeem preferred stock that had been issued to the U.S. Treasury in exchange for the $90 million.

Since then, 24 other U.S. banking companies have returned the money.

With $273.5 million from two stock offerings over the last year, Iberiabank is watchful for other acquisitions, though company officials have refused to speculate on specifics since the FDIC doles out assumptions on a bid basis.

Green said he expected more action to come from Iberiabank after settling into Florida.

"I think Iberiabank will continue," Green said. "It will be a temporary resting point until they get the people in place. But I think they will continue to be an active player."

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In Sarasota, this bank is suddenly a player in Florida By John Hielscher

Published: Wednesday, November 18, 2009 at 1:00 a.m. Last Modified: Tuesday, November 17, 2009 at 6:32 p.m.

In one swift move, IberiaBank has become the fifth-largest bank in Sarasota and Manatee counties.

Click to enlarge Related Links: • Ousted Orion Bank CEO drawing scrutiny • Federal regulators close Century, Orion banks

External Links: • Search ratings: How safe is your bank?

By taking over the failed Century Bank of Sarasota and Orion Bank of Naples last Friday, IberiaBank

grabbed $928 million in deposits and a 5.1 percent share in the Bradenton-Sarasota-Venice market.

Not bad for a bank from Lafayette, La., that was not even here before.

Statewide, IberiaBank vaulted from 215th place, with $132.5 million in deposits, to No. 20, with

nearly $3 billion.The timing was perfect to expand in Florida, says chief executive officer Daryl G.

Byrd."When everyone wanted to be in Florida and pay five times book for overvalued assets, we

expanded in Louisiana and Arkansas," Byrd said this week. "We believe this is the right time, price

and risk structure to enter these Florida markets.

"We like the changing competitive landscape in Florida. As you know, we like competing with large,

clumsy, line-of-business banks. We also believe there will be significant consolidation in Florida

through this cycle," he said.

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IberiaBank acquired 34 offices, $3.1 billion in assets and $2.5 billion in loans from Century and

Orion. Loss-share agreements with the Federal Deposit Insurance Corp. cover $2.6 billion in assets.

Before the deals, IberiaBank's Florida presence was three offices in the Jacksonville area bought in

August from the failed CapitalSouth Bank of Birmingham, Ala.

Now, Florida will account for 36 percent of its loans and 35 percent of its deposit base, said John

Davis, senior executive vice president.

The bank, a consumer and commercial lender, is excited about growth opportunities in this part of

Florida, Byrd said, but it expects to take a "thoughtful" approach to lending.

Both Century and Orion were crippled by huge levels of bad loans.

"We are fortunate to be in a position to be patient from a lending perspective, given our strong

pipeline across our entire system," he said.

The Sarasota and Naples markets, among the most affluent in Florida, were especially attractive for

the wealth-management and private-banking business that IberiaBank wants to grow.

The bankers did not comment on whether they will close any of Century's 11 or Orion's 23 offices.

Century employs 133, Orion 260.

Before last week's deal, IberiaBank was a $6.5-billion-asset bank with 101 offices in six states. It also

operates title insurance offices and 43 mortgage offices in 11 states.

Analyst Michael Rose of Raymond James Equity Research kept his "strong buy" recommendation on

shares of parent IberiaBank Corp. following the acquisitions.

The company earned $24.3 million, or $1.22 per share, in the third quarter, up from $8.5 million, or 66

cents per share, a year earlier. Analyst BauerFinancial Inc. rated it a four-star "excellent" bank in the

second quarter.

IberiaBank's shares, which trade under the symbol "IBKC" on the Nasdaq, were selling for $56.64 at

the close of trading on Tuesday, up $2.21, or 4.2 percent. The shares jumped 18 percent on Monday,

the first day investors could act on news of the company's acquisitions of Century and Orion.

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Press Release

FDIC Board Adopts Proposed Interim Final Rule To Provide A Transitional Safe Harbor For All Participations And Securitizations

FOR IMMEDIATE RELEASE November 13, 2009

Media Contact: Andrew Gray at (202) 898-7192

Email: angray@fdic.gov

On November 12, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) adopted a proposed Interim Final Rule amending 12 C.F.R. § 360.6 to provide a transitional safe harbor effective immediately for all participations and securitizations in compliance with that rule as originally adopted in 2000. In summary, the Interim Final Rule confirms that participations and securitizations completed or currently in process on or before March 31, 2010 in reliance on the FDIC's existing regulation will be 'grandfathered' and continue to be protected by the safe harbor provisions of Section 360.6 despite changes to generally accepted accounting principles adopted by the Financial Accounting Standards Board.

"The Board's action provides needed clarity to the financial markets," said FDIC Chairman Sheila C. Bair. "With changing accounting rules, we need both to ensure that participations and securitizations that have relied on our existing regulation retain that protection and to consider needed reforms for securitization going forward."

At the meeting, Chairman Bair also announced that FDIC staff would propose to the Board at its December meeting a set of conditions that securitizations initiated after March 31st must meet to receive 'safe harbor' treatment. "We have seen the problems that the 'originate to distribute' model played in the build-up to the financial crisis," Chairman Bair concluded, "and we must ensure that future securitizations do not place the Deposit Insurance Fund and our financial system in jeopardy."

The safe harbor protection provided by the Interim Final Rule continues for the life of the participation or securitization if the financial assets were transferred into the transaction or, for revolving securitization trusts, beneficial interests were issued on or before March 31, 2010 and the participation or securitization complied with Section 360.6. Under this transitional safe harbor, the participation or securitization will comply with the Section 360.6 requirement that any transfers into the transaction meet all conditions for sale accounting treatment under generally accepted accounting principles, other than the 'legal isolation' condition, if the transfers satisfied generally accepted accounting principles in effect for reporting periods prior to November 15, 2009.

For participations and securitizations that meet those requirements, the Interim Final Rule provides that the FDIC shall not, by exercise of its authority to disaffirm or repudiate contracts, seek to reclaim, recover, or recharacterize as property of the institution or the receivership any financial assets transferred in connection with the securitization or participation, even if the transaction does not satisfy all conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after November 15, 2009. As a result, any financial assets transferred into such securitizations or participations will not be treated as property of the institution or receivership, and consequently the consent requirement of 12 USC §1821(e)(13)(C) will not apply.

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Bank & Thrift - Industry News November 13, 2009 1:24 PM ET By Nathan Stovall Bankers at the Sandler O'Neill & Partners East Coast Financial Services Conference said Nov. 12 that the industry is gearing up for robust M&A activity, but forecast that near-term opportunities will likely be limited to government-assisted transactions given the difficulty in gauging another bank's asset quality. Broadcasting plans to hunt for FDIC-assisted deals has been a common refrain heard from bankers in the past few months. It seems that many bankers feel the need to offer investors an offensive story, even if they do not see that many bank failures arising either in their footprint or nearby. Some bankers, including a few at the Sandler conference, do have their finger on the deal trigger and are ready to move quickly when an opportunity arises in their market. There should be plenty of chances to pull the trigger and execute FDIC-assisted transactions, according to bankers at the Sandler event. State Bancorp Inc. President and CEO Thomas O'Brien predicted that close to 500 banks will fail this cycle and thinks a substantial number of other capital-starved institutions will seek merger partners as well. The shakeout would decrease the number of banks in the U.S. to roughly 5,000, from the current level of 8,000-plus. At least in the short run though, most bankers at the Sandler event did not see themselves buying live banks due to concerns over the health of sellers' balance sheets. Valley National Bancorp Chairman and CEO Gerald Lipkin said he would much prefer buying failed banks from the FDIC — transactions that usually come with limited asset risk given the presence of a loss-sharing agreement on the failed institution's loan portfolio. "A non-FDIC [deal] will be very difficult, not impossible, but very difficult to do in today's economy," Lipkin said. Seacoast Banking Corp. of Florida Chairman and CEO Dennis Hudson III was even less optimistic about the prospect of live bank deals. With asset values declining significantly, Hudson said accounting rules make it nearly impossible to get a clean M&A deal done. United Community Banks Inc. President and CEO Jimmy Tallent seemed to agree, arguing that bank mergers will be restricted to government-assisted deals. He said bank failures will create opportunities for some banks, but noted that there will be closures where there are no buyers, particularly in Georgia, where a number of failures have already occurred. Other bank executives at the conference took a different stance and said bidders for failed institutions would actually increase going forward as the pace of failures ramps up. Even if that happened, it seems unlikely that it would change the stance of some banks at the Sandler conference, which seem to be taking a deliberate approach to government-assisted deals. Capital City Bank Group Inc. falls in the category of potential acquirers that will remain patient regardless of the number of bidders or availability of government-assisted opportunities in the market. Capital City Chairman and CEO William Smith Jr. said the company has $80 million in excess capital and is looking for FDIC-assisted opportunities in towns outside of Jacksonville and Tampa, Fla.; Birmingham and Mobile, Ala.; and Atlanta.

Robust M&A activity lies ahead, but FDIC deals are near-term focus

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"There are more opportunities and assisted transactions than we have money (for) today," Smith said. He noted that the company is conducting due diligence on a number of banks; however, Smith said he plans to wait for those institutions to fail before making an offer. Smith said the company went through one bidding process with the FDIC and despite losing, found the process helpful. He further said the company does not review FDIC deals from only a financial standpoint, noting that targets must also represent a strategic fit. For example, he said Capital City would not disrupt its attractive deposit makeup by acquiring a failed institution whose cost of funds was five times as high as its own. Other bankers at the Sandler event noted that they might not be able to participate in FDIC-assisted transactions simply due to the lack of many bank failures in their respective footprints. Hudson City Bancorp Inc. Chairman and CEO Ronald Hermance Jr. said he gets to look at every FDIC deal that comes down the pike and believes many of those transactions "look terrific" from a financial standpoint. However, he noted that no bank failures of significant size have occurred within his company's footprint. Even if FDIC-assisted deals do not surface in their markets, a few executives said they were willing to look at live banks. Danvers Bancorp Inc. Chairman, President and CEO Kevin Bottomley said he certainly is not averse to doing more acquisitions. And a NewAlliance Bancshares Inc. executive said at the event that the company would look at transactions along the Amtrak corridor from Boston to New York and even as far south as Maryland. FirstMerit Corp., which just inked a transaction to buy 24 branches in the Chicago area, is still on the prowl for deals. CEO PaulGreig said the company has the capacity in its systems to handle another $8 billion in assets and noted that the company has prepared for acquisitions for over a year now. It seems that FirstMerit is not alone in its preparations, as most of the aforementioned institutions have also been getting ready for deals for some time. The intentions of the bankers at the Sandler event seem clear; the question is when will they act?

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Speeches & Testimony

Remarks by FDIC Chairman Sheila Bair at the Institute of International Bankers Conference; New York, NY November 10, 2009

Today I want to talk about how we can strengthen our banking system by restoring market discipline.

Looking back over just the past 12 to 18 months, it's abundantly clear that the market failed to prevent the excessive risk-taking that drove our financial system to the brink of collapse. Of course, the government also failed to prevent the crisis.

So the critical question is do we now have the willpower -- both in government and in the industry -- to address a root cause of the crisis by eliminating the belief that the government will always support large, interconnected financial firms? Or will we maintain the status quo and risk a repeat of this episode sometime down the road?

Key resolution features

To end too big to fail, we need an effective mechanism to close large, financial intermediaries when they get into trouble. A good model is the FDIC process for banks. To prevent bank runs from spreading and affecting the broader financial system, insured deposits must be made immediately available to the customers of failed institutions. To achieve this, the insurer itself must have ready access to funding. In the case of the FDIC, this is accomplished by maintaining a Deposit Insurance Fund and by the existence of government lines of credit as an emergency backstop for potential liquidity needs.

A second feature of our resolution scheme is the ability to recycle valuable banking relationships and assets from the failed bank back into the private sector via acquisition. This allows the FDIC to reduce losses to the Deposit Insurance Fund while ensuring that these valuable relationships and assets can continue to finance economic activity that creates new jobs. Banking relationships with businesses and consumers are costly to establish and valuable to maintain. Whenever possible, they should be preserved in the resolution process.

A third feature of our resolution scheme is that we can provide continuity for the capital markets, trust and transactions services that were being provided by failing institution to its customers. Similar to traditional bank lending relationships, these services also cannot be immediately replaced without substantial cost or a significant disruption to real economic activity. An efficient resolution process ensures continuity for such transactions. In the case of larger institutions, this continuity is sometimes preserved by the temporary creation of a bridge bank.

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The FDIC is the only Federal government agency with the responsibility for resolving failing banks and thrifts. The FDIC seamlessly resolves failing institutions using a receivership system separate from the court-administered bankruptcy process. Since 1934, the FDIC has been involved in more than 3,000 insured depository institution failures and assistance transactions. This year alone, the FDIC has resolved 120 institutions that held total deposits of $112 billion, almost all of which will turn out to be fully insured.

Resolution vs. bankruptcy

While the FDIC has, for the most part, the legal authorities and resources to efficiently resolve insured depository institutions that have failed, a large share of financial intermediation now takes place outside of traditional insured depositories. When these institutions become critically undercapitalized, there is no recourse other than the commercial bankruptcy process. While bankruptcy works well to resolve the vast majority of business failures, it is not well-suited for resolving large interconnected financial firms.

As we saw with the financial crisis, large financial firms are subject to the same types of liquidity runs as banks. And when they run into trouble, it's essential to have the ability to act quickly and decisively to maintain critical operations, retain franchise value, and protect the public interest.

By contrast, the commercial bankruptcy process begins by freezing creditor claims and giving management a right to reorganize. This process does not provide the type of continuity and certainty embodied in the rules that govern the FDIC's receivership authority. Forcing large, non-bank financial institutions through the bankruptcy process can create significant risks for the real economy by disrupting key financial relationships and transactions.

In bankruptcy, there is no readily available funding to ensure the continuity of operations. Absent bankruptcy financing, the courts will typically force liquidation even if that raises the costs to claimants and disrupts essential services. In bankruptcy, there is no option for a bridge bank that can provide continuity of operations until the failed institution is sold. The lack of an acceptable alternative to bankruptcy tied the hands of policy makers in the recent crisis.

It was clear that these non-depository financial institutions were too important to the global financial system to subject them to the costs and economic uncertainties of the bankruptcy process. But absent an alternative process for intervention and resolution, policy makers were forced to extend the public safety net at taxpayer expense to support a number of financial institutions. In doing so, governments made explicit the fact that some institutions are simply too big to fail.

Addressing too big to fail

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This crisis has given us an opportunity to achieve significant regulatory reform. It is imperative that we meet this challenge head-on and not sidestep our responsibilities to ensure financial stability and to protect the taxpayers. We must create a more resilient, transparent, and better regulated financial system – one that combines stronger and more effective regulation with market discipline.

Our first task is to end too big to fail. Only by doing so can we ensure a competitive balance between large and small institutions and limit the built-in incentives for large, complex financial firms to take on greater risk, greater leverage and greater size. There are four elements to this task.

Resolution authority

First, we must have an effective and credible resolution mechanism that provides for the orderly wind-down of systemically important financial firms, while avoiding financial disruptions that could devastate our financial markets and the global economy. I believe that the best option is to create a resolution mechanism that makes it possible to break-up and sell the failed firm. It should be designed to protect the public interest, prevent the use of taxpayer funds, and provide continuity for the failed institution's critical functions.

The FDIC's present receivership authority is a good model. We have the authority if necessary to temporarily move key functions of the failed institution to a newly chartered bridge bank. We also have the obligation to impose losses on those who should bear them in the event of a failure. Shareholders of the failed bank typically lose all of their investment, and unsecured creditors generally lose some or all of the amounts owed to them. Top management is replaced, as are other employees who contributed to the institution's failure. And the assets of the failed institution are eventually sold to a stronger, better managed institution.

This type of resolution mechanism should be applied to all systemically important financial institutions – whether banks or non-banks. We should require that these firms prepare detailed plans for their dissolution (so-called "living wills"). This would assist the receiver, and allow financial markets to continue to function smoothly while the firm's operations are transferred or unwound in an orderly manner. This process could address the potential for systemic risk without a bailout and without the near panic we saw a year ago.

Importantly, over the long run, it would provide the market discipline that is so clearly lacking from the present arrangement. A new resolution scheme for systemically important non-banks would need access to liquidity in order to effect a resolution, provide continuity of services and complete transactions that are in process at the time of failure. This would facilitate an orderly wind down. And costs associated with the resolution would be borne by shareholders and creditors.

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In my view, it is vital that the funding for working capital should come from the industry. A reserve fund should be established, maintained and funded in advance of any failure by imposing risk-based assessments on the industry. This would not be a bail-out fund. This would not be an insurance fund. It would provide short term liquidity to maintain essential operations of the institution as it is broken up and sold off. It would not be used to `recapitalize or prop-up failing firms. Only this pre-funded approach can assure that taxpayers will not once again be presented the bill for these failures.

Building a resolutions fund balance in advance would also help prevent the need for imposing assessments during an economic crisis, and assure that any failed firms will have paid something into the fund. Loss absorption by the shareholders and creditors would provide clear rules and signals to the market that will be crucial to restoring market discipline in our financial sector.

International Cooperation

Second, a more resilient resolution process also requires greater international cooperation, as our largest financial firms now span the globe. Under current resolution protocols, systemically important institutions operate under national laws that focus on domestic concerns. In a crisis, the domestic resolution laws of most countries are simply inadequate to deal with the complexities posed by cross-border financial firms. As a consequence, there is no functioning international resolution process.

The FDIC has co-chaired a working group under the auspices of the Basel Committee to evaluate current law and policy and make recommendations for the future. The report recommends reform and greater harmonization of national laws to achieve more effective tools to resolve cross-border institutions. It also recommends specific steps to reduce the likelihood that a failure in one country will create a crisis in another.

Moving toward a more 'universal' resolution approach will require us to address some difficult issues – such as how to share the costs of a resolution and how to provide an international forum to resolve disputes. Today, the lack of any internationally agreed upon protocols means that ring-fencing or a territorial approach is the likely outcome. Recognizing this reality, we must consider how improvements in governance and operational autonomy within an international holding company structure could enhance the ability to conduct resolutions and avoid future bailouts.

Living wills are one key initiative supported by the Basel Committee working group and the G-20 leaders. These plans would be developed in cooperation with the resolution authority and reviewed and updated annually. Clearly, this would be helpful to any future receiver. But I believe they also would be of

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immense assistance to financial institutions themselves by highlighting dependencies, risks, and ways to improve their own resiliency in a crisis.

Tougher bank capital standards needed

Third, stronger bank capital standards also are urgently needed. There's an emerging consensus among policymakers around the world on this point. I'm encouraged by some of the capital reform discussions under way in the Basel Committee. Yet while international regulators certainly are "talking the talk", it is far too early to declare victory.

Despite almost universal agreement the Basel I-based capital requirements were too low, bank supervisors around the world are diligently implementing a rule designed to lower those requirements still more. I refer to the advanced approaches of Basel II. The advanced approaches were designed at a time when confidence in the reliability of banks' internal models and risk estimates went almost unchallenged. Banks outside the U.S. have been reporting lower capital requirements from Basel II even during the depths of the current downturn, when the risk estimates driving those requirements are surely as pessimistic as they will ever be.

There is little doubt that there will be eye-popping reductions in required capital when the good times return to banking. The obvious lesson of the crisis is that we need to strengthen capital standards at our large banks, not weaken them.

From the FDIC's perspective, banks may not use the advanced approaches to lower their capital. I expect our supervisors to require the general risk-based capital requirements to serve as a floor under the advanced approaches, as a condition of any bank's approval. For now, that means Basel I will serve as a floor. Once we finalize the new rules for the standardized approach under Basel II, I anticipate that will serve as a new higher floor.

To repeat: large banks today need more capital, not less.

Incentives to reduce size and complexity

The fourth and final major task in creating a new resolution process is considering alternative measures that will curb the unbridled growth and complexity of large, systemically important firms.

One way to achieve this is to significantly raise the cost of being too big or interconnected. Institutions deemed to pose a systemic risk by virtue of their size or activities should be subject to higher capital and liquidity requirements – as well as higher deposit insurance premiums – commensurate with the risks they pose to the system and the competitive benefits they derive from their unique regulatory situation.

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In addition, large financial holding companies should be subject to tougher prompt corrective action standards under U.S. law. And they should be subject to holding company capital requirements that are no less stringent than those for insured banks. Off-balance-sheet assets and conduits, which turned out to be not-so-remote from their parent organizations in the recent crisis, should be counted and capitalized as on-balance-sheet risks.

Conclusion

As you know, Congress is tackling these very serious issues. The FDIC is working closely with Chairman Barney Frank in developing a responsible approach that will end bail-outs, promote competition and restore market discipline for our largest institutions. I'm very pleased with the progress to date in the House Financial Services Committee toward ending too big to fail.

It is my understanding Chairman Frank's proposed legislation will be strengthened. Including certain areas: the elimination of assistance to specific open firms so that firms that fail are closed; a ban on capital investments so that in the future government will not take an ownership interest in financial institutions; a resolution process that makes shareholders and creditors, not taxpayers, bear the losses; a pre-funded systemic resolution fund paid by the largest financial firms, to provide working capital for orderly resolutions; and a higher standard for both the FDIC and the Federal Reserve to provide support to healthy institutions in the event of a systemic meltdown of the type that we saw last October.

Chairman Frank will conclude his committee work next week. And I believe the House will consider this tough legislative proposal in December.

We've had too many years of unfettered risk-taking, and too many years of government subsidized risk. It's time we changed the rules of the game. It's time we closed the book on the doctrine of too big to fail. Only by instituting a credible resolution process and removing the existing incentives for size and complexity can we limit systemic risk, and the long-term competitive advantages and public subsidy it confers on the largest institutions.

Thank you.

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September 24, 2009

Small Banks Dip Toes into IPO Waters

By Marissa Fajt

A small Florida bank raised $70 million through an initial public offering Wednesday, in what is believed to be the first such deal in the banking sector in two years. With another one on the way from a Texas bank, some industry observers said more privately held companies could be encouraged to test the thawing capital markets now. Though none predict an IPO onslaught, they called the warm reception for 1st United Bancorp in Boca Raton notable, given that Florida is among the states hardest hit by the real estate meltdown. The $633 million-asset bank even had enough investor interest to upsize the offering; it initially sought $50 million. Rudy Schupp, its president and chief executive officer, said 1st United wanted the capital immediately to buy struggling or failed banks in its home state. But he acknowledged that general market conditions for IPOs are less than ideal. "It was probably a brave thing to do, and it is probably timing that many would not choose," Schupp said. "But from our perspective, the opportunity for growth is now." 1st United started the process of going public earlier this year, and several lawyers and investment bankers said more banks are likely to do so now that the flow of capital into the industry is picking up. One IPO is already in the works from the $4.4 billion-asset PlainsCapital Corp. in Dallas. It filed with the Securities and Exchange Commission in August to raise up to $140 million. PlainsCapital executives would not discuss the offering. Before 1st United, the most recent IPO in the banking industry had been from Encore Bancshares Inc. in Houston in July 2007, according to information provided by Stifel, Nicolaus & Co. Encore raised $41.6 million. But the capital crunch is not isolated to banks. Over the past two years the IPO market has slowed down across all industries. According to data from IPOfinancial.com, 23 IPOs have priced so far this year, versus 43 in the same period last year and 144 in 2007. David Menlow, the president of IPOfinancial.com, said it appears the market is beginning to rebound. There were nine deals scheduled to price this week. "This week is the kickoff to what we expect to be a fairly respectable fourth quarter," Menlow said. Some said other banks are likely to come to market.

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"We think there will be more to come," said Will Luedke, a partner in the Houston office of the law firm Bracewell & Giuliani LLP. "It is abundantly clear now, either through a couple IPOs or a number of private placements, there is capital for banks. We are convinced that capital is available." But others contend that 1st United was an exception to the IPO freeze. "I think they were in a unique position," said Jack Greeley, an attorney with Smith MacKinnon Pak in Orlando. "I don't think in today's environment you will start to see a trend, yet." Most agreed that the ones who succeed in finding investors will likely have a similar profile to 1st United: a clean balance sheet, a good standing with regulators and the chance to use the capital for acquisitions. "It is a very selective market," said Ben Plotkin, the vice chairman of Stifel, Nicolaus. "You have to have a company that is clean and has an experienced management team and has shown an ability to do deals and leverage the capital. It is a positive sign for the market, but not a green light for all." (Stifel was the lead manager and sole book runner for the 1st United's deal.) Some industry observers said 1st United's stock sale does not fit the standard definition on an IPO because its shares had been on the pink sheets. However, others familiar with the IPO market disagreed with that assessment, arguing that the company has never done a public offering previously and had virtually no stock trades. Schupp said the company had to register after it bought the $180 million-asset Equitable Bank in Fort Lauderdale last year for $55.6 million in cash and stock. That pushed the number of shareholders above the threshold for a private company. In the offering Wednesday, 1st United sold its shares at $5 each, a slight discount to tangible book value. On Wednesday the shares closed at $6.10. Schupp said the management of 1st United has experience with acquisitions and plans to use it. The company's three top executives have overseen 31 bank deals in their careers. They also have completed two acquisitions since joining 1st United in 2003, when it had $68 million of assets. Besides Equitable, the company also acquired most of Citrus Bank from CIB Marine Bancshares Inc. in Pewaukee, Wis. 1st United took the Citrus branches, $188 million in deposits and about $40 million in loans in the deal. Now the company intends to look for acquisitions in markets where the leadership team - which includes Warren S. Orlando, the chairman, and John Marino, the chief operating officer and chief financial officer - have operated banks before. Before joining 1st United, Orlando co-founded and was CEO and president of the former 1st United Bancorp in Boca Raton, which sold itself to Wachovia Corp. in 2002. That company had grown to $1.2 billion in assets through 11 acquisitions before being sold. Marino was the chief financial officer there. "In our past, we stretched from the Keys to Orlando and over to Tampa - central and south Florida," Schupp said. "All those markets are appealing to us. Ideally, in this business, it makes sense to stay close to your legacy markets.

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Speeches & Testimony

Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on Examining the State of the Banking Industry before the Subcommittee on Financial Institutions, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Room 538, Dirksen Senate Office Building October 14, 2009

Chairman Johnson, Ranking Member Crapo and members of the Subcommittee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) regarding the condition of FDIC-insured institutions and the deposit insurance fund (DIF). While challenges remain, evidence is building that financial markets are stabilizing and the American economy is starting to grow again. As promising as these developments are, the fact is that bank performance typically lags behind economic recovery and this cycle is no exception. Regardless of whatever challenges still lie ahead, the FDIC will continue protecting insured depositors as we have for over 75 years.

The FDIC released its comprehensive summary of second quarter 2009 financial results for all FDIC-insured institutions on August 27. The FDIC's Quarterly Banking Profile provided evidence that the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line. As a result, the number of problem institutions increased significantly during the quarter. We expect the numbers of problem institutions to increase and bank failures to remain high for the next several quarters.

My testimony today will review the financial performance of FDIC-insured institutions and highlight some of the most significant risks that the industry faces. In addition, I will discuss the steps that we are taking through supervisory and resolutions processes to address risks and to reduce costs from failures. Finally, I will summarize the condition of the DIF and the recent steps that we have taken to strengthen the FDIC's cash position.

Economy

In the wake of the financial crisis of last Fall and the longest and deepest recession since the 1930s, the U.S. economy appears to be growing once again. Through August, the index of leading economic indicators had risen for five consecutive months. Consensus forecasts call for the economy to grow at a rate of 2.4 percent or higher in both the third and fourth quarters. While this relative improvement in economic conditions appears to represent a turning point in the business cycle, the road to full recovery will be a long one that poses additional challenges for FDIC-insured institutions.

While we are encouraged by recent indications of the beginnings of an economic recovery, growth may still lag behind historical norms. There are several reasons why the recovery may be less robust than was the case in the past. Most important are the dislocations that have occurred in the balance sheets of the household sector and the financial sector, which will take time to repair.

Households have experienced a net loss of over $12 trillion in net worth during the past 7 quarters, which amounts to almost 19 percent of their net worth at the beginning of the period. Not only is the size of this wealth loss unprecedented in our modern history, but it also has been spread widely among households to the extent that it involves declines in home values. By some measures, the average price of a U.S. home has declined by more than 30 percent since mid-2006. Home price declines have left an estimated 16 million mortgage borrowers "underwater"

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and have contributed to an historic rise in the number of foreclosures, which reached almost 1.5 million in just the first half of 2009.1

Household financial distress has been exacerbated by high unemployment. Employers have cut some 7.2 million jobs since the start of the recession, leaving over 15 million people unemployed and pushing even more people out of the official labor force. The unemployment rate now stands at a 26-year high of 9.8 percent, and may go higher, even in an expanding economy, while discouraged workers re-enter the labor force.

In response to these disruptions to wealth and income, U.S. households have begun to save more out of current income. The personal savings rate, which had dipped to as low as 1.2 percent in the third quarter of 2005, rose to 4.9 percent as of second quarter 2009 and could go even higher over the next few years as households continue to repair their balance sheets. Other things being equal, this trend is likely to restrain growth in consumer spending, which currently makes up more than 70 percent of net GDP.

Financial sector balance sheets also have undergone historic distress in the recent financial crisis and recession. Most notably, we have seen extraordinary government interventions necessary to stabilize several large financial institutions, and now as the credit crisis takes its toll on the real economy, a marked increase in the failure rate of smaller FDIC-insured institutions. Following a five-year period during which only ten FDIC-insured institutions failed, there were 25 failures in 2008 and another 98 failures so far in 2009.

In all, FDIC-insured institutions have set aside just over $338 billion in provisions for loan losses during the past six quarters, an amount that is about four times larger than their provisions during the prior six quarter period. While banks and thrifts are now well along in the process of loss recognition and balance sheet repair, the process will continue well into next year, especially for commercial real estate (CRE).

Recent evidence points toward a gradual normalization of credit market conditions amid still-elevated levels of problem loans. We meet today just one year after the historic liquidity crisis in global financial markets that prompted an unprecedented response on the part of governments around the world. In part as a result of the Treasury's Troubled Asset Relief Program (TARP), the Federal Reserve's extensive lending programs, and the FDIC's Temporary Liquidity Guarantee Program (TLGP), financial market interest rate spreads have retreated from highs established at the height of the crisis last Fall and activity in interbank lending and corporate bond markets has increased.

However, while these programs have played an important role in mitigating the liquidity crisis that emerged at that time, it is important that they be rolled back in a timely manner once financial market activity returns to normal. The FDIC Board recently proposed a plan to phase out the debt guarantee component of the Temporary Liquidity Guarantee Program (TLGP) on October 31st. This will represent an important step towards putting our financial markets and institutions back on a self-sustaining basis. And even while we seek to end the various programs that were effective in addressing the liquidity crisis, we also recognize that we may need to redirect our efforts to help meet the credit needs of household and small business borrowers.

For now, securitization markets for government-guaranteed debt are functioning normally, but private securitization markets remain largely shut down. During the first seven months of 2009, $1.2 trillion in agency mortgage-backed securities were issued in comparison to just $9 billion in private mortgage-backed securities. Issuance of other types of private asset-backed securities (ABS) also remains weak. ABS issuance totaled only $118 billion during the first 9 months of 2009 in comparison to $136 billion during the first 9 months of 2008 and peak annual issuance of $754 billion in 2006.

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Significant credit distress persists in the wake of the recession, and has now spread well beyond nonprime mortgages. U.S. mortgage delinquency and foreclosure rates also reached new historic highs in second quarter of 2009 when almost 8 percent of all mortgages were seriously delinquent. In addition, during the same period, foreclosure actions were started on over 1 percent of loans outstanding.2 Consumer loan defaults continue to rise, both in number and as a percent of outstanding loans, although the number of new delinquencies now appears to be tapering off. Commercial loan portfolios are also experiencing elevated levels of problem loans which industry analysts suggest will peak in late 2009 or early 2010.

Recent Financial Performance of FDIC-Insured Institutions

The high level of distressed assets is reflected in the weak financial performance of FDIC-insured institutions. FDIC-insured institutions reported an aggregate net loss of $3.7 billion in second quarter 2009. The loss was primarily due to increased expenses for bad loans, higher noninterest expenses and a one-time loss related to revaluation of assets that were previously reported off balance sheet. Commercial banks and savings institutions added $67 billion to their reserves against loan losses during the quarter. As the industry has taken loss provisions at a rapid pace, the industry's allowance for loan and lease losses has risen to 2.77 percent of total loans and leases, the highest level for this ratio since at least 1984. However, noncurrent loans have been growing at a faster rate than loan loss reserves, and the industry's coverage ratio (the allowance for loan and lease losses divided by total noncurrent loans) has fallen to its lowest level since the third quarter of 1991.3

Insured institutions saw some improvement in net interest margins in the quarter. Funding costs fell more rapidly than asset yields in the current low interest rate environment, and margins improved in the quarter for all size groups. Nevertheless, second quarter interest income was 2.3 percent lower than in the first quarter and 15.9 percent lower than a year ago, as the volume of earning assets fell for the second consecutive quarter. Industry noninterest income fell by 1.8 percent compared to the first quarter.

Credit quality worsened in the second quarter by almost all measures. The share of loans and leases that were noncurrent rose to 4.35 percent, the highest it has been since the data were first reported. Increases in noncurrent loans were led by 1-to-4 family residential mortgages, real estate construction and development loans, and loans secured by nonfarm nonresidential real estate loans. However, the rate of increase in noncurrent loans may be slowing, as the second-quarter increase in noncurrent loans was about one-third smaller than the volume of noncurrent loans added in first quarter. The amount of loans past-due 30-89 days was also smaller at the end of the second quarter than in the first quarter. Net charge-off rates rose to record highs in the second quarter, as FDIC-insured institutions continued to recognize losses in the loan portfolios. Other real estate owned (ORE) increased 79.7 percent from a year ago.

Many insured institutions have responded to stresses in the economy by raising and conserving capital, some as a result of regulatory reviews. Equity capital increased by $32.5 billion (2.4 percent) in the quarter. Treasury invested a total of $4.4 billion in 117 independent banks and bank and thrift holding companies during the second quarter, and nearly all of these were community banks. This compares to a total of more than $200 billion invested since the program began. Average regulatory capital ratios increased in the quarter as well. The leverage capital ratio increased to 8.25 percent, while the average total risk-based capital ratio rose to 13.76 percent. However, while the average ratios increased, fewer than half of all institutions reported increases in their regulatory capital ratios.

The nation's nearly 7,500 community banks -- those with less than $1 billion in total assets -- hold approximately 11 percent of total industry assets. They posted an average return on assets of negative 0.06 percent, which was slightly better than the industry as a whole. As larger banks often have more diverse sources of noninterest income, community banks typically get a much

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greater share of their operating income from net interest income. In general, community banks have higher capital ratios than their larger competitors and are much more reliant on deposits as a source of funding.

Average ratios of noncurrent loans and charge-offs are lower for community banks than the industry averages. In part, this illustrates the differing loan mix between the two groups. The larger banks' loan performance reflects record high loss rates on credit card loans and record delinquencies on mortgage loans. Community banks are important sources of credit for the nation's small businesses and small farmers. As of June 30, community banks held 38 percent of the industry's small business and small farm loans.4 However, the greatest exposures faced by community banks may relate to construction loans and other CRE loans. These loans made up over 43 percent of community bank portfolios, and the average ratio of CRE loans to total capital was above 280 percent.

As insured institutions work through their troubled assets, the list of "problem institutions" -- those rated CAMELS 4 or 5 -- will grow. Over a hundred institutions were added to the FDIC's "problem list" in the second quarter. The combined assets of the 416 banks and thrifts on the problem list now total almost $300 billion. However, the number of problem institutions is still well below the more than 1,400 identified in 1991, during the last banking crisis on both a nominal and a percentage basis. Institutions on the problem list are monitored closely, and most do not fail. Still, the rising number of problem institutions and the high number of failures reflect the challenges that FDIC-insured institutions continue to face.

Risks to FDIC-Insured Institutions

Troubled loans at FDIC-insured institutions have been concentrated thus far in three main areas -- residential mortgage loans, construction loans, and credit cards. The credit quality problems in 1-to-4 family mortgage loans and the coincident declines in U.S. home prices are well known to this Committee. Net chargeoffs of 1- to 4-famly mortgages and home equity lines of credit by FDIC-insured institutions over the past two years have totaled more than $65 billion. Declining home prices have also impacted construction loan portfolios, on which many small and mid-sized banks heavily depend. There has been a ten-fold increase in the ratio of noncurrent construction loans since mid-year 2007, and this ratio now stands at a near-record 13.5 percent. Net charge-offs for construction loans over the past two years have totaled about $32 billion, and almost 40 percent of these were for one-to-four family construction.

With the longest and deepest recession since the 1930s has come a new round of credit problems in consumer and commercial loans. The net charge-off rate for credit card loans on bank portfolios rose to record-high 9.95 percent in the second quarter. While stronger underwriting standards and deleveraging by households should eventually help bring loss rates down, ongoing labor market distress threatens to keep loss rates elevated for an extended period. By contrast, loans to businesses, i.e., commercial and industrial (C&I) loans, have performed reasonably well given the severity of the recession in part because corporate balance sheets were comparatively strong coming into the recession. The noncurrent loan ratio of 2.79 percent for C&I loans stands more than four times higher than the record low seen in 2007, but remains still well below the record high of 5.14 percent in 1987.

The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending. While financing vehicles such as commercial mortgage-backed securities (CMBS) have emerged as significant CRE funding sources in recent years, FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, and their exposure to CRE loans stands at an historic high. As of June, CRE loans backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2 percent of total loans and leases.

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The deep recession, in combination with ongoing credit market disruptions for market-based CRE financing, has made this a particularly challenging environment for commercial real estate. The loss of more than 7 million jobs since the onset of the recession has reduced demand for office space and other CRE property types, leading to deterioration in fundamental factors such as rental rates and vacancy rates. Amid weak fundamentals, investors have been re-evaluating their required rate of return on commercial properties, leading to a sharp rise in "cap rates" and lower market valuations for commercial properties. Finally, the virtual shutdown of CMBS issuance in the wake of last year's financial crisis has made financing harder to obtain. Large volumes of CRE loans are scheduled to roll over in coming quarters, and falling property prices will make it more difficult for some borrowers to renew their financing.

Outside of construction portfolios, losses on loans backed by CRE properties have been modest to this point. Net charge-offs on loans backed by nonfarm, nonresidential properties have been just $6.2 billion over the past two years. Over this period, however, the noncurrent loan ratio in this category has quadrupled, and we expect it to rise further as more CRE loans come due over the next few years. The ultimate scale of losses in the CRE loan portfolio will very much depend on the pace of recovery in the U.S. economy and financial markets during that time.

FDIC Response to Industry Risks and Challenges

Supervisory Response to Problems in Banking Industry

The FDIC has maintained a balanced supervisory approach that focuses on vigilant oversight but remains sensitive to the economic and real estate market conditions. Deteriorating credit quality has caused a reduction in earnings and capital at a number of institutions we supervise which has resulted in a rise in problem banks and the increased issuance of corrective programs. We have been strongly advocating increased capital and loan loss allowance levels to cushion the impact of rising non-performing assets. Appropriate allowance levels are a fundamental tenet of sound banking, and we expect that banks will add to their loss reserves as credit conditions warrant -- and in accordance with generally accepted accounting principles.

We have also been emphasizing the importance of a strong workout infrastructure in the current environment. Given the rising level of non-performing assets, and difficulties in refinancing loans coming due because of decreased collateral values and lack of a securitization market, banks need to have the right resources in place to restructure weakened credit relationships and dispose of other real estate holdings in a timely, orderly fashion.

We have been using a combination of off-site monitoring and on-site examination work to keep abreast of emerging issues at FDIC-supervised institutions and are accelerating full-scope examinations when necessary. Bankers understand that FDIC examiners will perform a thorough, yet balanced asset review during our examinations, with a particular focus on concentrations of credit risk. Over the past several years, we have emphasized the risks in real estate lending through examination and industry guidance, training, and targeted analysis and supervisory activities. Our efforts have focused on underwriting, loan administration, concentrations, portfolio management and stress testing, proper accounting, and the use of interest reserves.

CRE loans and construction and development loans are a significant examination focus right now and have been for some time. Our examiners in the field have been sampling banks' CRE loan exposures during regular exams as well as special visitations and ensuring that credit grading systems, loan policies, and risk management processes have kept pace with market conditions. We have been scrutinizing for some time construction and development lending relationships that are supported by interest reserves to ensure that they are prudently administrated and accurately portray the borrower's repayment capacity. In 2008, we issued guidance and produced a journal article on the use of interest reserves,5 as well as internal review procedures for examiners.

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We strive to learn from those instances where the bank's failure led to a material loss to the DIF, and we have made revisions to our examination procedures when warranted. This self-assessment process is intended to make our procedures more forward-looking, timely and risk-focused. In addition, due to increased demands on examination staff, we have been working diligently to hire additional examiners since 2007. During 2009, we hired 440 mid career employees with financial services skills as examiners and almost another 200 examiner trainees. We are also conducting training to reinforce important skills that are relevant in today's rapidly changing environment. The FDIC continues to have a well-trained and capable supervisory workforce that provides vigilant oversight of state nonmember institutions.

Measures to Ensure Examination Programs Don't Interfere with Credit Availability

Large and small businesses are contending with extremely challenging economic conditions which have been exacerbated by turmoil in the credit markets over the past 18 months. These conditions, coupled with a more risk-averse posture by lenders, have diminished the availability of credit.

We have heard concerns expressed by members of Congress and industry representatives that banking regulators are somehow instructing banks to curtail lending, making it more difficult for consumers and businesses to obtain credit or roll over otherwise performing loans. This is not the case. The FDIC provides banks with considerable flexibility in dealing with customer relationships and managing loan portfolios. I can assure you that we do not instruct banks to curtail prudently managed lending activities, restrict lines of credit to strong borrowers, or require appraisals on performing loans unless an advance of new funds is being contemplated.

It has also been suggested that regulators are expecting banks to shut off lines of credit or not roll-over maturing loans because of depreciating collateral values. To be clear, the FDIC focuses on borrowers' repayment sources, particularly their cash flow, as a means of paying off loans. Collateral is a secondary source of repayment and should not be the primary determinant in extending or refinancing loans. Accordingly, we have not encouraged banks to close down credit lines or deny a refinance request solely because of weakened collateral value.

The FDIC has been vocal in its support of bank lending to small businesses in a variety of industry forums and in the interagency statement on making loans to creditworthy borrowers that was issued last November. I would like to emphasize that the FDIC wants banks to make prudent small business loans as they are an engine of growth in our economy and can help to create jobs at this critical juncture.

In addition, the federal banking agencies will soon issue guidance on CRE loan workouts. The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values. Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.

Innovative resolution structures

The FDIC has made several changes to its resolution strategies in response to this crisis, and we will continue to re-evaluate our methods going forward. The most important change is an increased emphasis on partnership arrangements. The FDIC and RTC used partnership arrangements in the past -- specifically loss sharing and structured transactions. In the early 1990s, the FDIC introduced and used loss sharing. During the same time period, the RTC

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introduced and used structured transactions as a significant part of their asset sales strategy. As in the past, the FDIC has begun using these types of structures in order to lower resolution costs and simplify the FDIC's resolution workload. Also, the loss share agreements reduce the FDIC's liquidity needs, further enhancing the FDIC's ability to meet the statutory least cost test requirement.

The loss share agreements enable banks to acquire an entire failed bank franchise without taking on too much risk, while the structured transactions allow the FDIC to market and sell assets to both banks and non-banks without undertaking the tasks and responsibilities of managing those assets. Both types of agreements are partnerships where the private sector partner manages the assets and the FDIC monitors the partner. An important characteristic of these agreements is the alignment of interests: both parties benefit financially when the value of the assets is maximized.

For the most part, after the end of the savings and loan and banking crisis of the late 1980s and early 1990s, the FDIC shifted away from these types of agreements to more traditional methods since the affected asset markets became stronger and more liquid. The main reason why we now are returning to these methods is that in the past several months investor interest has been low and asset values have been uncertain. If we tried to sell the assets of failed banks into today's markets, the prices would likely be well below their intrinsic value -- that is, their value if they were held and actively managed until markets recover. The partnerships allow the FDIC to sell the assets today but still benefit from future market improvements. During 2009, the FDIC has used loss share for 58 out of 98 resolutions. We estimate that the cost savings have been substantial: the estimated loss rate for loss share failures averaged 25 percent; for all other transactions, it was 38 percent. Through September 30, 2009, the FDIC has entered into seven structured transactions, with about $8 billion in assets.

To address the unique nature of today's crisis, we have made several changes to the earlier agreements. The earlier loss share agreements covered only commercial assets. We have updated the agreements to include single family assets and to require the application of a systematic loan modification program for troubled mortgage loans. We strongly encourage our loss share partners to adopt the Administration's Home Affordable Modification Program (HAMP) for managing single family assets. If they do not adopt the HAMP, we require them to use the FDIC loan modification program which was the model for the HAMP modification protocol. Both are designed to ensure that acquirers offer sustainable and affordable loan modifications to troubled homeowners whenever it is cost-effective. This serves to lower costs and minimize foreclosures. We have also encouraged our loss share partners to deploy forbearance programs when homeowners struggle with mortgage payments due to life events (unemployment, illness, divorce, etc). We also invite our loss share partners to propose other innovative strategies that will help keep homeowners in their homes and reduce the FDIC's costs.

In addition, the FDIC has explored funding changes to our structured transactions to make them more appealing in today's environment. To attract more bidders and hopefully higher pricing, the FDIC has offered various forms of leverage. In recent transactions where the leverage was provided to the investors, the highest bids with the leverage option substantially improved the overall economics of the transactions. The overall feedback on the structure from both investors and market participants was very positive.

The Condition of the Deposit Insurance Fund

Current Conditions and Projections

As of June 30, 2009, the balance (or net worth) of the DIF (the fund) was approximately $10 billion. The fund reserve ratio -- the fund balance divided by estimated insured deposits in the banking system -- was 0.22 percent. In contrast, on December 31, 2007, the fund balance was

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almost $52 billion and the reserve ratio was 1.22 percent. Losses from institution failures have caused much of the decline in the fund balance, but increases in the contingent loss reserve -- the amount set aside for losses expected during the next 12 months -- has contributed significantly to the decline. The contingent loss reserve on June 30 was approximately $32 billion.

The FDIC estimates that as of September 30, 2009, both the fund balance and the reserve ratio were negative after reserving for projected losses over the next 12 months, though our cash position remained positive. This is not the first time that a fund balance has been negative. The FDIC reported a negative fund balance during the last banking crisis in the late 1980s and early 1990s.6 Because the FDIC has many potential sources of cash, a negative fund balance does not affect the FDIC's ability to protect insured depositors or promptly resolve failed institutions.

The negative fund balance reflects, in part, an increase in provisioning for anticipated failures. The FDIC projects that, over the period 2009 through 2013, the fund could incur approximately $100 billion in failure costs. The FDIC projects that most of these costs will occur in 2009 and 2010. In fact, well over half of this amount will already be reflected in the September 2009 fund balance. Assessment revenue is projected to be about $63 billion over this five-year period, which exceeds the remaining loss amount. The problem we are facing is one of timing. Losses are occurring in the near term and revenue is spread out into future years.

At present, cash and marketable securities available to resolve failed institutions remain positive, although they have also declined. At the beginning of the current banking crisis, in June 2008, total assets held by the fund were approximately $55 billion, and consisted almost entirely of cash and marketable securities (i.e., liquid assets). As the crisis has unfolded, the liquid assets of the fund have been expended to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. As of June 30, 2009, while total assets of the fund had increased to almost $65 billion, cash and marketable securities had fallen to about $22 billion. The pace of resolutions continues to put downward pressure on cash balances. While the less liquid assets in the fund have value that will eventually be converted to cash when sold, the FDIC's immediate need is for more liquid assets to fund near-term failures.

If the FDIC took no action under its existing authority to increase its liquidity, the FDIC projects that its liquidity needs would exceed its liquid assets next year.

The FDIC's Response

The FDIC has taken several steps to ensure that the fund reserve ratio returns to its statutorily mandated minimum level of 1.15 percent within the time prescribed by Congress and that it has sufficient cash to promptly resolve failing institutions.

For the first quarter of 2009, the FDIC raised rates by 7 basis points. The FDIC also imposed a special assessment as of June 30, 2009 of 5 basis points of each institution's assets minus Tier 1 capital, with a cap of 10 basis points of an institution's regular assessment base. On September 22, the FDIC again took action to increase assessment rates -- the board decided that effective January 1, 2011, rates will uniformly increase by 3 basis points. The FDIC projects that bank and thrift failures will peak in 2009 and 2010 and that industry earnings will have recovered sufficiently by 2011 to absorb a 3 basis point increase in deposit insurance assessments. We project that these steps should return the fund to a positive balance in 2012 and the reserve ratio to 1.15 percent by the first quarter of 2017.

While the final rule imposing the special assessment in June permitted the FDIC to impose additional special assessments of the same size this year without further notice and comment rulemaking, the FDIC decided not to impose any additional special assessments this year. Any additional special assessment would impose a burden on an industry that is struggling to achieve

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positive earnings overall. In general, an assessment system that charges institutions less when credit is restricted and more when it is not is more conducive to economic stability and sustained growth than a system that does the opposite.

To meet the FDIC's liquidity needs, on September 29 the FDIC authorized publication of a Notice of Proposed Rulemaking (NPR) to require insured depository institutions to prepay about three years of their estimated risk-based assessments. The FDIC estimates that prepayment would bring in approximately $45 billion in cash.

Unlike a special assessment, prepaid assessments would not immediately affect the DIF balance or depository institutions' earnings. An institution would record the entire amount of its prepaid assessment as a prepaid expense (asset) as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, the institution would record an expense (charge to earnings) for its regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, the institution would record an expense and an accrued expense payable each quarter for its regular assessment, which would be paid in arrears to the FDIC at the end of the following quarter. On the FDIC side, prepaid assessments would have no effect on the DIF balance, but would provide us with the cash needed for future resolutions.

The proposed rule would allow the FDIC to exercise its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution.

The FDIC believes that using prepaid assessments as a means of collecting enough cash to meet upcoming liquidity needs to fund future resolutions has significant advantages compared to imposing additional or higher special assessments. Additional or higher special assessments could severely reduce industry earnings and capital at a time when the industry is under stress. Prepayment would not materially impair the capital or earnings of insured institutions. In addition, the FDIC believes that most of the prepaid assessment would be drawn from available cash and excess reserves, which should not significantly affect depository institutions' current lending activities. As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than they did a year ago.7

In the FDIC's view, requiring that institutions prepay assessments is also preferable to borrowing from the U.S. Treasury. Prepayment of assessments ensures that the deposit insurance system remains directly industry-funded and it preserves Treasury borrowing for emergency situations. Additionally, the FDIC believes that, unlike borrowing from the Treasury or the FFB, requiring prepaid assessments would not count toward the public debt limit. Finally, collecting prepaid assessments would be the least costly option to the fund for raising liquidity as there would be no interest cost. However, the FDIC is seeking comment on these and other options in the NPR.

The FDIC's proposal requiring prepayment of assessments is really about how and when the industry fulfills its obligation to the insurance fund. It is not about whether insured deposits are safe or whether the FDIC will be able to promptly resolve failing institutions. Deposits remain safe; the FDIC has ample resources available to promptly resolve failing institutions. We thank the Congress for raising our borrowing limit, which was important from a public confidence standpoint and essential to assure that the FDIC is prepared for all contingencies in these difficult times.

Conclusion

FDIC-insured banks and thrifts continue to face many challenges. However, there is no question that the FDIC will continue to ensure the safety and soundness of FDIC-insured financial

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institutions, and, when necessary, resolve failed financial institutions. Regarding the state of the DIF and the FDIC Board's recent proposal to have banks pay a prepaid assessment, the most important thing for everyone to remember is that the outcome of this proposal is a non-event for insured depositors. Their deposits are safe no matter what the Board decides to do in this matter. Everyone knows that the FDIC has immediate access to a $100 billion credit line at Treasury that can be expanded to $500 billion with the concurrence of the Federal Reserve and the Treasury. We also have authority to borrow additional working capital up to 90 percent of the value of assets we own. The FDIC's commitment to depositors is absolute, and we have more than enough resources at our disposal to make good on that commitment.

I would be pleased to answer any questions from the members of the Subcommittee. I could not find the questions section yet but will.

1 Sources: Moody's Economy.com (borrowers "underwater") and FDIC estimate based upon Mortgage Bankers Association, National Delinquency Survey, second quarter 2009 (number of foreclosures).

2 Source: Mortgage Bankers Association, National Delinquency Survey, Second Quarter 2009

3 Noncurrent loans are loans 90 or more days past due or in nonaccrual status.

4 Defined as commercial and industrial loans or commercial real estate loans under $1 million or farm loans less than $500,000.

5 FDIC, Supervisory Insights,http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum08/article01_Primer.html

6 The FDIC reported a negative fund balance as of December 31, 1991 of approximately -$7.0 billion due to setting aside a large ($16.3 billion) reserve for future failures. The fund remained negative for five quarters, until March 31, 1993, when the fund balance was approximately $1.2 billion.

7 Liquid balances include balances due from Federal Reserve Banks, depository institutions and others, federal funds sold, and securities purchased under agreements to resell.

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Alistair Barr is a reporter for MarketWatch in San Francisco.

WEEKEND INVESTOR Oct. 16, 2009, 8:20 p.m. EDT · Recommend (2) · Post: Bank failures create regional winners Strong lenders benefit from buying troubled rivals seized by FDIC By Alistair Barr, MarketWatch SAN FRANCISCO (MarketWatch) -- The wave of bank failures washing over the U.S. is creating opportunities for regional lenders that are strong enough to pick up the debris, with help from the Federal Deposit Insurance Corp.

US Bancorp (USB 23.41, -0.60, -2.50%), BB&T (BBT 28.25, -0.36, -1.26%) and Zions Bancorp (ZION 18.17, -0.65, -3.45%) have already benefited from buying failed banks in so-called FDIC-assisted deals where the regulator promises to cover a lot of the future losses on the assets being assumed. Other banks that could do similar deals include Columbia Banking System(COLB 15.36, -0.05, -0.32%), Hancock Holding Co. (HBHC 36.53, -0.44, -1.19%) and People's United Financial Inc. (PBCT 16.15, +0.28, +1.76%), according to Keefe, Bruyette & Woods. Investors not charged up about fees Even sophisticated investors don't pay attention to fees and expenses, but costs are crucial to investment returns, says WSJ's Personal Finance columnist Jason Zweig. He speaks with Kelsey Hubbard.

"We're soon going over 100 bank failures this year and that number could reach 500 or more in future," Fred Cannon, an analyst at KBW, said in an interview.

KBW reckons a select group of regional banks with sufficient capital, credit quality and management talent will be able to expand, either by rolling up failed institutions or acquiring market share in other ways.

"If you can pick the winners in the regional bank space, there are real opportunities," Cannon added.

In addition to Columbia, Hancock and People's United, KBW has compiled a list of 27 other banks that it says are poised to benefit by snapping up failed rivals. U.S. Bancorp(USB 23.41, -0.60, -2.50%), Westamerica Bancorp (WABC 51.03, -0.23, -

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0.45%), Iberiabank(IBKC 44.90, -0.83, -1.82%), PacWest Bancorp (PACW 18.25, -0.39, -2.09%) and TCF Financial (TCBK 15.59, -0.03, -0.19%) are among the acquisition-minded lenders on the firm's list. "We're not sure which banks will get these FDIC deals, but we're pretty sure some of them will," Cannon said. "So a basket of these names is a great place to be."

Profitable strategy

Banks are failing at the fastest rate in more than a decade as last year's financial crisis and surging unemployment leave the industry nursing heavy loan losses. More than 1,000 banks may fail during the next three to five years, RBC Capital Markets estimated in February. See full story. Buying failed banks can be more profitable than acquiring healthy institutions.

When the FDIC tries to sell a collapsed bank, the regulator tells potential bidders what it thinks the threshold for future losses will be. It then offers to share those losses with the winning bidder.

The FDIC usually agrees to take 80% of losses up to its forecast threshold and then 95% of any losses above that. This means bidding banks have a good idea what their maximum loss will be when they make an offer.

The price tags for failed institutions are also often negative -- meaning banks get paid to take troubled firms off the FDIC's hands.

Banks will often pay a slight premium for the deposits of failed institutions, but they will make bigger negative bids for the assets. So far this year, most purchases of failed banks have carried negative price tags, according to FBR Capital Markets.

"With FDIC assistance, you basically get paid to do the deal -- cash in hand," Paul Miller, an analyst at FBR, said in an interview. "The FDIC takes most of the risk of the loan portfolio and you get the deposits basically for free."

These deals can "easily" generate returns on equity of 20% or more, with little risk, Miller added.

'Nice spread'

A case in point: Prosperity Bancshares Inc. (PRSP 35.56, +0.45, +1.28%), which also made KBW's list. In November 2008, Houston-based Prosperity acquired roughly $3.7 billion in deposits of failed Texas lender Franklin Bank from the FDIC. Prosperity agreed to purchase just $850 million of Franklin Bank's $5.1 billion in assets, so it didn't get a loss-sharing deal from the FDIC.

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However, the transaction has still been a big boost for Prosperity, according to President and Chief Operating Officer Dan Rollins.

Prosperity invested the deposits it got from Franklin in government securities and made "a nice spread, which is what we do for a living," Rollins explained.

The bank has been building provisions for loan losses rapidly this year and the fees it pays for FDIC insurance have shot up. But the bank is still reporting higher earnings.

"You have to attribute that to Franklin," Rollins said.

On Friday, Prosperity reported a 90% jump in third-quarter profit. Net interest income, before provision for credit losses, jumped 34%. That was driven by a 36% increase in average earning assets -- the result of the Franklin Bank deposits and assets that Prosperity assumed from the FDIC.

Prosperity wants to do more of these deals and Rollins expects there will be ample opportunities.

"Problem assets always lag the economy, so we still have multiple quarters of this cycle to go," he said, recalling the rash of bank failures that started in Texas in the late 1980s.

"From 1988 to 1992, many banks failed in Texas, but the Texas economy was doing quite well in the early 1990s," Rollins said.

'Wild ride'

However, Rollins' last point illustrates the potential pitfalls of investing in the regional bank sector. With big loan losses still to come, some lenders will continue to suffer. Indeed, the FDIC excludes some banks from bidding on failed institutions because they're considered not financially strong enough or have weak management.

Regional banks are particularly exposed to commercial real estate, including construction and development loans. These assets are considered by some analysts to be the next source of major losses for the banking industry. See related story. Construction and development loans are usually large, and losses on these assets can appear unexpectedly for investors -- unlike residential mortgages where loss trends are more predictable. Synovus Financial Corp. (SNV 3.62, -0.19, -4.99%), which has large exposure to commercial real estate, may continue to suffer heavy loan losses, Stuart Plesser, an analyst at Standard & Poor's Equity Research, said in an interview. That means investors in regional bank stocks should prepare for a "wild ride," Plesser said. Alistair Barr is a reporter for MarketWatch in San Francisco.

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FDIC Approves Bank Plan FDIC Approves Rules for Private Equity Buying Banks

The Federal Deposit Insurance Corporation has eased its restrictions on private equity firms buying banks but even with this concession many private equity firms are not happy with the deal. The FDIC voted 4-1 to approve a 10% capital requirement for banks owned by private equity firms. This is a step back from the strict 15% tier 1 leverage ratio that was originally proposed. However private equity firms must meet a much higher ratio than the 5% required of "well capitalized" banks and still higher than the 8% tier 1 leverage ratio required of new banks. The FDIC is looking to private equity firms to rescue the some of the 81 banks it has shut down this year and others that have fallen in the recession and are expected to in the next few months. If buyers like private equity firms do not purchase these banks the FDIC will have to cover the failed banks with its $13 billion insurance fund. Although some private equity firms have already moved to buy stakes in banks, many seem to have been waiting on the FDIC's ruling to see if its a profitable investment. The new policy suggests avoiding the controversial capital ratio requirement by forming partnerships with current bank holding companies to bid for failed banks. Another contentious issue is the requirement that private equity buyers hold onto the banks for at least three years. This demand was kept and Chair Sheila Bair explained "We do want people who are interested in running banks." A chief concern according to the FDIC is that private equity firms with little to no experience in the banking industry will put the banks and taxpayers at risk. The Private Equity Council is an advocacy group for several of the largest private equity firms and it has been a key negotiator with the FDIC. Douglas Lowenstein, President of the Private Equity Council, has already voiced its dissatisfaction with the ruling in a statement issued today:

“The revised FDIC guidelines represent an improvement over those originally proposed in July. But we continue to question the need to impose more onerous capital requirements on private equity firms that invest on behalf of retired police officers, firefighters, teachers, and other public employees. “At a time when the nation’s banks are struggling to raise capital, it is counterproductive to impose measures that could deter investors who are ready, willing and able to provide that capital. Higher capital thresholds could make it less likely that private equity investors will bid on failed banks. At a minimum, it will reduce the value of any bids, increasing the resolution costs for the FDIC and creating greater likelihood that the agency will be forced to tap the $500 billion line of credit put up by American taxpayers. Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise.

“That said, we appreciate the fact that the FDIC will review this guidance in six months. We hope that this review will yield a long-term policy that will equally benefit the customers and communities of failed banks, the FDIC, private investors, and the United States’ taxpayers.”

The Private Equity Council represents: Apax Partners; Apollo Global Management LLC;Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital. This is an important issue for private equity and the banking industry so I have been covering this in some

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detail. Here are some of the articles and resources on the FDIC's regulation of private equity firms investing in banks:

FDIC Private Equity

FDIC Proposes Strict Guidelines for Private Equity

The Federal Deposit Insurance Corp proposed tough guidelines for private equity firms to buy failed banks. The FDIC announced Thursday a plan that calls for private equity groups to meet strong capital requirements and commit to long-term investments, in order to purchase the collapsed banks. The proposal requires private equity groups to consistently maintain strong capital in the banks, "specifically a Tier 1 leverage ratio of 15 percent, for three years. They would also generally have to maintain the investment in a bank for three years." Additionally, private equity groups must provide a "contractual cross guarantee," in which a firm that owns two banks allows the healthier institution to provide aid for the weaker. Private equity groups would also be discouraged from lending credit to their own investment funds, affiliates or portfolio companies. Furthermore, private equity groups owning banks would need to major disclosures about their ownership structure, giving regulators greater insight as to who is running the investment. Bank regulators on the FDIC's board argued openly over the guidelines with some officials saying that such tough measures will only scare off private equity investors, a much-needed source of capital for troubled banks. While alternative investors may be the saving grace for the banks, as traditional sources of capital have failed to rescue them. But bank regulators are nervous that allowing private equity groups to buy banks may be less secure than with traditional investors that are subject to strict regulation by the SEC. Yet other regulators, like Comptroller of the Currency John Dugan feel that opening up to private equity investors will help the banks. He says, "I do fear that the current articulation of the proposal has standards that go too far. There is real money and real capital that can provide savings to the deposit insurance fund." On the other side of the fence are those who defend the strict guidelines, like FDIC Chairman Sheila Bair. She argued that the requirements are necessary for ensuring the stability of the banks but admitted, "I'm not sure we have it right here, but we do have a solid document."

Private equity firms have already started to move into the banking sector. Carlyle Group, Blackstone Group (BX.N), WL Ross & Co. and Centerbridge Partners decided to invest $900 million toward rescuing Florida's BankUnited.

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Firms poised to bet billions on real estate

ASSOCIATED PRESS This land in Baldwin County, Ala., was becoming a subdivision, but now sits dormant. The real estate downturn has left swaths of distressed land across the country -- land that investors see as a prime target. But the vulture firms have competition -- big builders. By KEVIN L. McQUAID

Published: Tuesday, October 13, 2009 at 1:00 a.m. Last Modified: Monday, October 12, 2009 at 10:10 p.m.

LAKEWOOD RANCH - Starwood Land Ventures LLC does not like to think of itself as the 800-

pound vulture in the residential real estate room.

FUNDS SEEING OPPORTUNITY • STARWOOD LAND VENTURES: A Lakewood Ranch affiliate of Starwood Capital Group, founder of the Westin Hotel chain and other companies, Starwood Land began in 2007 with the aim of acquiring $500 million in residential land in states like Florida, Arizona and California. To date, it has purchased $55

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million in assets. • VANGUARD LAND LLC: This Sarasota firm was created last year by John Peshkin, a former Taylor Woodrow chief executive and founder of Starwood Land. Vanguard is focusing on acquiring residential land in Florida, and to date has bought lots in Venice’s Pennington Place community and elsewhere. • ROCKWOOD CAPITAL LLC: Rockwood Capital is a New York-based private real estate investment company that now manages roughly $2.7 billion of equity commitments. Since 1980, the company has invested $11.6 billion in all, including office towers in New York City and the Reston community of Virginia. • D.E. SHAW & CO.: Started by a former Columbia University computer science professor in 1988, D.E. Shaw & Co. is among the nation’s largest private equity firms now hunting for real estate deals. In all, the company now has $29 billion in assets and 1,600 employees worldwide. • PAULSON & CO. INC.: A New York-based hedge fund with some $36 billion in assets under management, Paulson & Co. has aggressively purchased foreclosed real estate, troubled loans and mortgage backed securities. The firm, run by John A. Paulson and begun in 1994, has also begun lending capital to other hedge funds and banks. In January 2008, it announced that former Fed chief Alan Greenspan was joining the company’s advisory board. • WALTON STREET CAPITAL LLC: Walton Street Capital LLC is a private equity firm founded in 1994 to invest primarily in real estate. To date, Walton has invested or has committed to invest roughly $3 billion of equity in about 150 separate transactions.

Related Links: • Banks set to become region's largest landholders • Locals hit in building shakeout

"We're an opportunity fund," said Mike Moser, the Lakewood Ranch-based company's East Coast

president. "We're trying to invest in very, very high-risk, high-reward properties."

Even so, the vulture analogy is an apt one for the two-year-old company, an affiliate of

Connecticut Starwood Capital Group, best known for launching the successful Westin hotel

chain, lender iStar Financial and links operator Troon Golf.

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With roughly $500 million available to sop up distressed residential lots, soured real estate loans

and undeveloped property, Starwood Land is in an enviable position to capitalize on what it

believes will be a significant change in the way home builders operate from now on.

To date, Starwood Land has bought $55 million worth of real estate or debt that represents 2,500

lots, in California, Arizona and Florida.

But a funny thing has happened to Starwood and competitors like Vanguard Land LLC, Walton

Street Capital, D.E. Shaw & Co. and Paulson & Co. on the way to cashing in on the overheated,

devastated residential real estate industry: Publicly held, national home builders, though

staggered, have recovered -- somewhat.

Despite the lack of new sticks and bricks in many markets -- and hundreds of millions of dollars

in land position write-downs -- builders like NVR Ltd., Lennar Corp., Toll Bros., Pulte Homes

Inc. and others are active, and have managed to hoard cash. Lots of it. Nor do they appear afraid

to spend it.

NVR, of Virginia, recently spent about $40 million to buy land around Washington, D.C., that

was being shed from WCI Communities Inc.'s federal bankruptcy case.

Miami-based Lennar, for instance, has $1.44 billion on hand, according to filings with the U.S.

Securities and Exchange Commission. Pulte, a Michigan company that in August won

shareholder approval to merge with giant Texas-based builder Centex Corp., had $3.4 billion in

cash on hand as of March 31, company data shows.

"Everybody in the industry has been amazed at how the public builders have come back into the

market in the past 90 days," said Marc Perrin, a Starwood Capital managing director who

oversees the Starwood Land.

"They've been much more aggressive in buying up lots," Perrin said. "Certainly no one in January

thought they'd be there and be active.”‘ Disconnected from the value'

Lenders have not exactly fallen in line with Starwood Land's business plan, either.

When the company formed, its principals believed beleaguered banks -- fat with unwanted,

foreclosed properties and inundated with bad real estate loans -- would be eager sellers. But that

has not occurred.

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In addition to not lending for real estate these days, many banks still are not selling their seized

properties, and those that are selling have yet to fully re-evaluate the assets or debt on their books.

"Nine out of 10 times, the price banks are selling at are disconnected from the value of what the

property is today," said John R. Peshkin, chief executive of Taylor Woodrow North America until

August 2006 and Starwood Land's founder, who left the company after a year.

Meanwhile, the commodity Starwood Land is after -- land -- has fallen more than any other real

estate asset class, experts say.

"Undeveloped land seems to have no economic value," said Peshkin, who now runs Vanguard

Land, a private equity firm that is buying property in Venice and elsewhere.

"It's a pretty sad state of affairs," said Peshkin, whose firm includes his son, Daniel, and Taylor

Woodrow's former director of acquisitions. "Land has gone down in price to where it was 15

years ago. It's a unique time."

As a result, Starwood Land has rewritten its playbook a bit.

"Our business plan has changed somewhat," said Moser, who was Taylor Woodrow's tower

division president before joining Starwood Land in January 2008. "We originally thought we'd

spend $1 billion on acquisitions. That may have been a bit ambitious."

"We've concluded the opportune buying time will be a year or two years from now, whereas we'd

originally thought we'd have everything acquired by now," Moser said.

Staying lean

What Starwood Land has not done, however, is change its focus. The company has stayed lean --

it has just seven employees -- and still searches for only top-tier land deals of $5 million and

above, in select markets.

To gain a further advantage, Starwood Land has partnered with seven builders or residential

developers in markets like the Mid-Atlantic, California, the Carolinas, Texas and elsewhere.

Nor has Starwood Land compromised on its profit expectations. It still expects to reap at least a

20 percent gain on every deal.

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"We have to underwrite tremendous risk associated with the deals we do," Moser said.

Decidedly in Starwood Land's factor going forward, Moser and others say, is what is expected to

be a long-term, fundamental change in the way home builders buy and hold land.

In the past, builders would buy up large tracts of land at a time, and then sell them along with

their homes. During the nationwide real estate boom, from 2003 to 2006, competition forced

many builders to snap up larger and larger tracts of property.

But holding land cost builders and developers dearly when values fell and home sales stalled

beginning in 2006.

Toll Bros., one of the nation's largest builders, was forced earlier this year to write down more

than $450 million worth of land it could not build on.

"I think for some time to come, builders will still take the posture that they'll want someone else

to take the land risk in deals," said Peshkin, who has been named to a new board at Bonita

Springs-based WCI Communities, which is emerging from bankruptcy protection.

Moser and others believe builders will want to acquire only a few lots at a time and build on them

before buying more land. Publicly-traded builders, especially, are likely to be under intense

pressure to keep land holdings to a minimum, Moser and others said.

If that holds true, Starwood Land's and Vanguard's buy-and-hold philosophy could reap huge

rewards -- especially since Starwood Land also plans to provide equity financing and enter into

joint ventures with builders on new projects.

Until that happens, Moser said, Starwood Land will continue hunting for quality deals in top

markets like Orlando, where the company hopes to complete a purchase of 500 home lots before

year-end.

"Deal flow is still a little slow at this point, but we believe it'll come," Moser said. "We believe in

two years, actually, there will be a lot shortage in the better markets -- places like Orlando, Dallas

and Atlanta. And that's because inventory is getting chewed up a lot faster than most people

realize."

--

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Man on a Mission

By Michael Sisk

The nation's biggest banks may be getting their financial footing, but as 2009 comes to a close the bad news mounts for many regional and community banks. Real estate-related losses continue to pile up and most experts are predicting that hundreds of more banks could fail before the crisis subsides.

Then there is First Niagara Financial Group Inc. in Lockport, N.Y. - one mid-tier banking company that is ending the year on a roll.

Led by its charismatic chief executive, John Koelmel, First Niagara has raised close to $1 billion in three separate stock offerings since the fall of 2008 and used much of the proceeds to strike two big deals - first for 57 Bank branches in western Pennsylvania, and then for the embattled Harleysville National Corp. in suburban Philadelphia. By the time the deal for the $5.6 billion-asset Harleysville closes in early 2010, First Niagara will have doubled its assets in less than a year, to $20 billion, and significantly expanded its footprint beyond the confines of upstate New York.

Flush with capital and not burdened by asset quality issues, First Niagara is not done dealing, either. Just as banks a generation ago expanded by rolling up troubled or failing thrifts, Koelmel - a first-time CEO who's been on the job just three years - is determined to take advantage of the current turmoil to transform First Niagara into a regional power, says John Gorman, a partner at LuseGorman Pomerenk & Schick in Washington and a long-time advisor to First Niagara.

"There are companies that made their mark by the way they came through the [savings-and-loan] crisis," says Gorman. Koelmel "sees the opportunity that way.” Says Koelmel: "Our aspirations are to be something more than we are, something more than we will be even with Harleysville."

There are potential obstacles, to be sure, starting with the challenge of integrating two franchises in a new state and maintaining First Niagara's strong asset quality in a still-weakening economy.

But analysts and other observers who, in the last three years, have watched First Niagara evolve from an underperforming company that was under pressure to find a buyer to one of the industry's shining stars aren't about to bet against Koelmel."If all executives ran their companies like First Niagara, we would not have had a financial crisis," says Rick Weiss, an analyst at Janney Montgomery Scott. "It's as simple as that."

LOCAL BOY MAKES GOOD

Koelmel, 57, grew up in Orchard Park, N.Y., just outside of Buffalo, where his dad was a salesman for General Electric and his mother was a schoolteacher. When he went off to

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attend The College of Holy Cross in Worcester, Mass., in 1970 he figured he'd wind up in Boston or New York, but upon graduation, his aptitude for math took him on a round of interviews with the Big Eight accounting firms and, eventually, to Peat Marwick's Buffalo office.

Koelmel says he showed up "with hair too long, pants a bit too wide and red shoe with heels more than a bit too high," Koelmel says. "It was the Saturday Night Fever days and I had all the disco Danny looks."

Bob Weber, then a manager in the Buffalo office, remembers immediately taking a shine to the shaggy local boy who didn't fit the accounting stereotype. Like many youth Koelmel could be intemperate, and Weber often had to reel in his young protégé.

"I saw a lot of talent. But in his formative years he'd speak his mind with superiors and get himself in a little bit of trouble," Weber says. "At regional meetings he'd disagree with what they were saying, and later I'd tell him, 'John, you might think that way, but don't shoot yourself in the foot.'"

Koelmel took those early lessons to heart and rose rapidly through the ranks as the accounting firm got larger and eventually merged with KPMG. When Weber retired in 1995, Koelmel replaced his mentor as the managing partner of the Buffalo office.

Many of Koelmel's clients back then were banks, and what he liked best was working with management to help develop strategic plans. But by the end of the 1990s, he sensed a "philosophical shift" in which accountants who worked too closely with clients were perceived as biased and unable to objectively evaluate their finances. "It was increasingly harder for me to have that trusted advisor relationship with clients that I'd had for 20 or 25 years," Koelmel says. "I realized that my ability to add value and derive satisfaction day-in-and-day out was waning and I worried would diminish quickly."

CAREER CHANGE

So in 2000, Koelmel left KPMG for the No. 2 job at Five Star Bank in Warsaw, N.Y. It wasn't quite the right fit, though, and he left after a couple of years.

After that, for the first time, he began to seriously ponder what else he might do with his life. He interviewed to run a private school, contemplated seats on corporate boards, considered consulting, and even worked at a friend's collections company. "I was enjoying the flexibility, and I asked myself whether I wanted to get back on the corporate treadmill."

That all changed in early 2003 when Koelmel reconnected with then-First Niagara CEO Bill Swan. Koelmel knew Swan from his KPMG days and soon the two began to discuss whether there might be a role for Koelmel at the bank. Then, a few months later, there was a tragic turn of events. Swan, also the chairman of the board of trustees at St. Bonaventure University, grew despondent over a basketball scandal at his alma mater and took his own life.

Just days earlier, Swan had announced that First Niagara was buying the $1 billion-asset Troy Savings Bank in what was then its largest deal ever. Under Swan, First Niagara began an aggressive expansion into the Albany, N.Y., market, and Koelmel says his death was a catalyst for him and others "to step up and step in to perpetuate what Bill set in motion."

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Koelmel ultimately joined First Niagara as chief financial officer in January 2004 and in December 2006 he was named interim CEO when Paul Kolkmeyer stepped aside. In February 2007 he officially became CEO.

His first few months on the job were rocky as shareholders, frustrated by its sagging share price, pressured the company to find a buyer or - as many of its Rust Belt peers did - expand into faster-growing states, such as Florida. Koelmel, though, wasn't interested in either and instead struck a low-premium, in-market deal for Greater Buffalo Savings Bank in late 2007 that won him praise from the investment community.

Critics were further quieted by First Niagara's performance, which as mortgage crisis worsened, began looking better and better relative to the rest of the industry.

Koelmel does not profess to have some magic formula for keeping First Niagara out of trouble. He's steered clear of the worst of the financial crisis by following some basic principles of banking: carefully manage capital, credit underwriting, and liquidity.

"Those that lost their focus took a wrong path, whether geographically stretching too far too fast, or pursuing product alternatives that were misguided," he says. "The whole industry took on way too much risk for way too little reward."

After keeping a tight hold on the reins during the boom years, Koelmel sprang into action in the fall of 2008. He managed to raise $115 million just a few weeks after the collapse of Lehman Bros. - when the capital markets were essentially frozen - and soon thereafter accepted $184 million from the Treasury Department's Troubled Asset Relief fund.

In an interview with U.S. Banker in late 2008 he said the rationale for raising the capital was simple. "We're going to play offense, and to do that you need capital," he said. "There will be opportunities to lend more significantly over the next year or two and grow in our footprint organically."

The first big score occurred in April when First Niagara announced it would acquire the National City branches, which PNC Financial Services Group Inc. of Pittsburgh was divesting as a condition of buying Nat City. The deal, which closed in September, included $3.9 billion in deposits and $757 million in performing loans, and to finance it, First Niagara entered into a securities purchase agreement with PNC for a total of $150 million. (The 12 percent notes are callable without penalty at any time.) After raising another $380 million in April, then paying back TARP in May, Koelmel struck again, announcing the $237 million all-stock purchase of Harleysville, which has 83 branches in the Philadelphia area. The deal was priced at about 110 percent of tangible book value and included a novel provision that adjusted the exchange ratio should Harleysville's loan delinquencies rise above a certain level between the announcement and the close of the deal.

Tom Alonso, an analyst at Fox-Pitt Kelton, says he gives Koelmel and his team credit for capitalizing on a "once in a generation opportunity to expand the franchise in a tight time frame to a much bigger geographic footprint."

Gorman, meanwhile, says the deals were vintage Koelmel. While Koelmel has made no secret of his growth ambitions, one thing he won't do, Gorman says, is overpay.

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"Some CEOs get starry-eyed, they get caught up in the momentum of the deal. It gets to where they've got to get the deal, no matter what - what's another 50 cents a share? But that's not John."

PLOTTING THE FUTURE

Weiss says two acquisitions right on top of each other pose "integration challenges," though he points out that Koelmel and his management team had some practice after First Niagara bought Troy Savings and Husdon River Bank at roughly the same time earlier this decade. On the physical integration of the Harleysville and Nat City franchises, Koelmel says his job is to "make sure we have the right resources in place and then I get out of the way. The team is incredibly good at that physical integration."

On the cultural side, he takes a more active part. "I establish the tone, I personalize the company. I make it real and engage across the new organization so that people feel connected.” It’s a role that plays well to his strengths, says Tom Bowers, First Niagara's chairman. "He's a really strong communicator in both the written and spoken word. He's an unusual combination of CPA and charisma."

Mostly, though, Koelmel spends his time doing what he enjoys most: plotting the next move. "My job is to look ahead and keep running up the next hill and stay focused on opportunities. That requires us to have capital; it requires us to be nimble and to respond to opportunities," he says.

Koelmel cites three main levers for M&A growth over the near term. First, he expects to acquire customers and perhaps branches from big banks operating in First Niagara's footprint, such as Bank of America and Citibank.” They can't access enough capital in this new regulatory environment to support their business model and that means they have to shrink and shed not just assets but deposits," he says.

Second, he reckons that the tough economic environment and new regulatory requirements will force some smaller banks that had been fighting to remain independent to throw in the towel. And, finally, he's looking for opportunities to buy failed banks - but he won't stray too far.” These show up in my email every day, but none have been in our footprint," Koelmel says. "We'll be eyes wide open for FDIC- assisted transactions, but we'll be disciplined and diligent so we don't stretch ourselves too far and increase execution risk."

Koelmel says he won't rule out expanding into Ohio, Michigan, New England or the Mid-Atlantic states, but his priority is to fill in the wide gaps in New York and Pennsylvania. In New York, First Niagara has a strong presence in the Buffalo and Albany areas, but only a smattering of branches in between. In Pennsylvania, its branches will be largely concentrated in the state's two largest cities, Philadelphia and Pittsburgh, which are separated by roughly 300 miles.

"Long-term shareholder value will come from staying relatively narrowly focused and deepening our market share to become a premier player in each market, versus being a mile wide and an inch deep," Koelmel says. The growth plan also includes a relocation of the company's corporate headquarters from Lockport to Buffalo, a move Koelmel says will further raise First Niagara's profile.

"In five years we'll have further emerged as a strong regional player in the new world order of financial services," he says.

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WSJ • SEPTEMBER 11, 2009

Ross Gets Nod for a Bank Charter Approval Opens Door for Bid on Failed Firms, as Related Cos. Seeks Corus Assets

• Article By NICK TIMIRAOS

Real-estate mogul Stephen M. Ross and the two other partners in his company, Related Cos., have been granted preliminary approval by regulators to charter a new bank, a move that would allow them to bid on failed institutions seized by the government.

The approval comes at a time that Related, a national real-estate developer known for such high-profile projects as Time Warner Center in New York, vies with a stable of private-equity and real-estate firms to buy the assets of condo lender Corus Bankshares Inc. With assets of $7 billion, Corus has warned that it is "critically undercapitalized," and many observers expect it to be seized by regulators soon.

As investors began circling Corus last spring, the Related partners filed an application with the Office of the Comptroller of Currency to form SJB National Bank, headed by Mr. Ross and Related executives Jeff Blau and Bruce Beal Jr. The OCC gave them preliminary approval in late July, according to a letter the agency released last month. Related would have no ownership interest in the bank.

SJB's application didn't reference a specific acquisition target. But the OCC's approval letter said that SJB Bank wouldn't "commence operations until after its bid for a particular institution is accepted" by the Federal Deposit Insurance Corp. A lawyer for SJB declined to comment.

According to the OCC approval letter, SJB Bank proposed as its chief executive Adolfo Henriques, a veteran Miami banking executive who in July was named chairman of Gibraltar Private Bank of Coral Gables, Fla. The OCC also approved Stuart M. Rothenberg, Goldman's former head of real-estate investments, as a potential bank director. Messrs. Henriques and Rothenberg didn't respond to requests for comment.

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The government's interest in attracting private capital to troubled banks has grown as the swelling number of bank failures strains the FDIC's fund. There have been 89 failures this year.

Globe Photos/Zuma Press

Related Cos.' Stephen M. Ross and two partners won approval to charter a bank -- if a bid for a 'particular institution is accepted.' Below, the Time Warner Center in New York could get company in Related's real-estate portfolio.

Getty Images Until now, most of the bank failures have been tied to the housing downturn and souring home loans. Corus Bank exemplifies a new crop of troubled institutions where pressure is growing from deteriorating construction and commercial real-estate loans.

Corus's condominium and other real-estate loans have drawn interest from investors because the 111 developments backing that debt are generally regarded as top-quality projects.

By contrast, Corus's banking franchise hasn't attracted much interest because the lender has only 11 branches and attracts deposits primarily by selling online certificates of deposit with above-market interest rates.

Bank regulators have split the assets and deposits of Corus and are soliciting bids for both units in an effort to draw higher bids for the FDIC-brokered auction. Related itself has teamed with Lubert-Adler Partners LP, a real-estate investment firm, and other

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investors to bid on the assets of Corus. The regulators' split makes it unnecessary for SJB to purchase the entire bank in order for Related and its partners to win control of Corus's condo assets.

Still, being able to bid on both the deposits and the assets of a bank could give a potential bidder a competitive leg up. "The advantage to the FDIC of selling both the assets and the liabilities to the same institution at the same time is that the FDIC doesn't have to write as big a check," said John Douglas, a former general counsel at the FDIC.

Other investors in the running to buy Corus's assets include Miami-based developer Crescent Heights and Dallas-based investor Lone Star Funds, Colony Capital LLC and iStar Financial Inc., and Starwood Capital Group. Bids on Corus assets, originally due on Tuesday, have been pushed back by at least two weeks, according to people familiar with the matter.

Mr. Ross, who in January completed his purchase of the Miami Dolphins football franchise, is the founder and chief executive of the closely held Related. Like other developers, the company has faced problems in the economic downturn. In February, it delayed for one year its $1 billion purchase of development rights to a 26-acre parcel on Manhattan's West Side, and its multibillion-dollar Grand Avenue project in Los Angeles remains stalled.

But Related also is positioned well to ride out the worst commercial real-estate market in decades. In late 2007, just before the market began to crater, Related raised $1.4 billion from Goldman Inc., an investment arm of Abu Dhabi, and other investors.

Separately, Ernst & Young LLP resigned last week as Corus's outside accounting firm, the bank said in a Securities and Exchange Commission filing on Friday. The bank said it isn't currently seeking a replacement. That resignation came days before Corus's own accounting chief left the company.

Write to Nick Timiraos at nick.timiraos@wsj.com

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The FDIC's Statement Of Policy On Qualifications For Failed Bank Acquisitions.

Originally published August 31, 2009

The Board Of Directors of the Federal Deposit Insurance Corporation ("FDIC") has adopted its final Statement of Policy on Qualifications for Failed Bank Acquisitions (the "Acquisition Policy Statement") by a 4-1 vote.1 As adopted, the Acquisition Policy Statement applies to investments by "private capital investors," which term appears to be the FDIC's name for private equity funds ("PEFs"), albeit the scope of application of the Acquisition Policy Statement remains unclear (as discussed in Section II of this memorandum) and will afford the regulators considerable discretion in its application.2

While the Acquisition Policy Statement is not as burdensome to PEFs as would have been the case under the Proposed Guidelines,3 as discussed in our prior Memorandum of July 15, 2009,4 it nonetheless imposes burdens on PEFs that will not apply to other investors in banks or thrifts. Accordingly, PEFs should give substantial consideration to structuring an acquisition in a manner that avoids application of the Acquisition Policy Statement. It appears to be possible to avoid application of the policy if a private capital investor partners with an established bank or thrift that has (i) a "strong majority" interest" in the acquisition transaction, and (ii) a "successful history" operating insured depository institutions (which we shall term the "Experienced Partner Exemption"). It will be desirable to consult early in acquisition planning with the FDIC and other bank regulators to determine whether the private capital investor will be able to benefit from the Experienced Partner Exemption.

I. BACKGROUND TO THE ACQUISITION POLICY STATEMENT: COMPETING CONSIDERATIONS The Acquisition Policy Statement was adopted against a background of increasing numbers of banks failures eroding the FDIC's Deposit Insurance Fund ("DIF"). As of August 31, 84 banks have failed this year. The DIF has shrunk by 75% from its level in January 2009. In addition, the FDIC is about to collect a special assessment from banks to replenish the DIF, and is already discussing the need for a second special assessment. Thus, on the one hand, the regulators would clearly like to bring new capital into the banking industry; on the other hand, it appears that new capital will not be treated equally with old capital.

During pre-vote consideration of the Acquisition Policy Statement, the FDIC Vice Chairman stated rather bluntly, "we need to attract bidders [for failed banks]" while FDIC Chairman Bair appeared comfortable that PEFs would be willing to bid on failed banks in light of the revisions made to the Proposed Guidelines by the Acquisition Policy Statement. The Acting Director of the Office of Thrift Supervision ("OTS"), the only Board member who voted against adoption,5 stated bluntly, prior to the vote, that the Acquisition Policy Statement essentially singled out non-bank investors as persona non-grata in the banking industry without adequate justification or inquiry.6

Chairman Bair noted that PEF buyers lacked "a buyer's balance sheet" and suggested that their opacity could put the FDIC at significant risk, especially in light of FDIC loss-sharing arrangements with certain buyers.7 She also asserted that PEFs were notorious

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for a short-term mindset with respect to their investments, and that such an approach might have an adverse long-term impact on the prospects of the target institution and the banking industry generally. In any event, the general view expressed by those voting in favor of the Acquisition Policy Statement was that the FDIC had struck a proper balance among competing public interests.

II. THE ACQUISITION POLICY STATEMENT: SCOPE AND APPLICABILITY The Acquisition Policy Statement technically applies to:

private investors in a company, including any company acquired to facilitate bidding on failed banks or thrifts that is proposing to, directly or indirectly, (including through a shelf charter) assume deposit liabilities, or such liabilities and assets, from the resolution of a failed insured depository institution; and

applicants for insurance in the case of de novo charters issued in connection with the resolution of failed insured depository institutions (hereinafter "Investors"). This covers investors in a company acquired to facilitate bidding and, of course, applies to investors in firms using a shelf charter to acquire liabilities of a failed bank or thrift.

Despite comments requesting greater precision in the definition of "private capital investor," the FDIC left the definition vague, giving the agency greater scope of authority to determine the definition by interpretation. The Acquisition Policy Statement indicates that, "the requirements it imposes on investors only apply to investors that agree to its terms," which would seem to suggest that in practice the application of the Acquisition Policy Statement will be open to discussion on a case-by-case basis with potential investors. Nevertheless, the FDIC may have the view that any "private capital investor" that voluntarily bids on a failed bank or thrift after adoption of the Acquisition Policy Statement is implicitly agreeing to be bound by the terms of the policy.

A. Club Deals While the clear intent of the Acquisition Policy Statement is to reach PEFs, its terms apply to "private capital investors," which is broad enough to cover so-called "club deals" in which no single PEF "controls" the bank or thrift.8

B. Experienced Partner Exemption The Acquisition Policy Statement would not apply to new investors partnering with existing banks or thrifts that have a "strong majority interest" in the acquired bank or thrift and a history of successful operation. The regulatory concern embodied in the Acquisition Policy Statement is clearly with new entrants to the banking industry. Indeed, the Vice Chairman of the FDIC expressly suggested that PEFs should partner with existing banks and thrifts, and the Acquisition Policy Statement expressly states that "[s]uch partnerships are strongly encouraged." However, the Acquisition Policy Statement is ambiguous as to whether, for instance, a PEF minority investment paired with an existing investor that had a 51% majority interest would be subject to the Acquisition Policy Statement.

One also has to ask whether a "private capital investor" in a bank that acquires a failed bank would be caught up in the Acquisition Policy Statement literally as a "private investor in a company proposing to assume liabilities" of a failed bank or whether that investor is exempt as being deemed to have partnered with the bank in which it has invested. It is conceivable that the answer might even turn on whether the acquiring

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bank in which the investor took a direct interest has an established record for successful operation or has itself had problems.

C. Small Investments In order to exclude de minimis investments from its scope, the Acquisition Policy Statement, by its terms, does not apply to investors with five percent or less of the total "voting power" of the acquired bank or thrift or holding company provided there is no evidence of concerted action. That said, the Acquisition Policy Statement does not set forth what constitutes evidence of concerted action, and leaves uncertainty as to whether the mere existence of an organizer who solicits several less-than-five percent investors would be sufficient to give rise to "concerted action" and loss of the de minimis exemption.

D. Duration Of Requirements An acquirer subject to the Acquisition Policy Statement may apply, after seven years, to be released from the requirements of the policy if the bank it has acquired has continuously maintained a CAMELS 1 or 2 rating.9 It would seem unlikely, however, that the successor to a failed bank or thrift would on the acquisition date be awarded the highest ratings immediately (and then could sustain that rating for seven years).10 In a more likely scenario, it would take some time for the acquired bank to achieve the rating, meaning that the Acquisition Policy Statement could apply to an acquisition for materially longer than seven years after the acquisition date.

III. THE PROPOSED GUIDELINES MODERATED IN THE ACQUISITION POLICY STATEMENT The Proposed Guidelines would have imposed eight basic requirements on a PEF buying a failed bank, including the source of strength commitment to maintain the bank's capital levels.11 These requirements would likely have very materially discouraged investment by PEFs into the banking system. Three aspects of the Proposed Guidelines received the greatest attention from commenters: the heightened capital requirement, the source of strength commitment, and the cross-guarantee provision. These three requirements have been moderated somewhat in the Acquisition Policy Statement, primarily due to the reasons outlined below.

A. Capital The Proposed Guidelines included a requirement that a failed bank acquired by a PEF maintain a 15% Tier 1 leverage ratio.12 That would have been triple the high-end range for well-capitalized banks and double the industry average. It would have put such a bank at a competitive disadvantage, reduced returns, and, some argue, encouraged risk-taking.

Historically, the FDIC has treated the acquisition of a failed bank or thrift as the creation of a de novo institution - that is, it is as if the bidder acquiring the failed bank was applying to the FDIC to open a new bank. As the FDIC has indicated, de novo banks have a higher risk profile than established banks and are overrepresented on the list of banks that have failed, often exhibiting inadequate controls and risk management. Accordingly, the FDIC is of the view that heightened capital levels at such "new" institutions are warranted.13

B. Source Of Strength The Proposed Guidelines would have required a "private capital investor" to serve as a source of financial and managerial strength to the acquired bank and to require holding companies in which a "private capital investor" had invested to sell equity or issue debt that qualified as capital. This vague requirement could have imposed unlimited liability on a "private capital investor" and made it difficult for it to raise

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funds. It is instructive to note that a PEF's organizational documents often limit the extent to which the PEF may provide capital support or make follow-on investments in its portfolio companies - thus it often would not have been possible for the PEF to comply with any source of strength requirement. The source of strength commitment has been eliminated from the Acquisition Policy Statement.

C. Cross-Guarantee The Proposed Guidelines also would have required a PEF that has majority interests in more than one bank or thrift to pledge to the FDIC its interest in each bank or thrift to guarantee the FDIC against loss caused by the failure of any such bank or thrift. This would have imposed a risk that most PEF investors would have declined to accept. The cross-guarantee provision has been reduced in scope to a cross-support provision, as described in Section IV.C below.

IV. SPECIFIC REQUIREMENTS OF PEFS IN THE ACQUISITION POLICY STATEMENT A. Capital The Acquisition Policy Statement requires a Tier 1 common equity14 ratio of ten percent for the first three years with a requirement thereafter that the bank remain well capitalized.15 However, the FDIC retains the flexibility to impose a higher capital requirement on a case by base basis depending on the business plan and experience of the acquirer. As in the Proposed Guidelines, a failure to maintain the heightened capital levels required under the Acquisition Policy Statement would require the FDIC to treat the institution as "undercapitalized" for purposes of Prompt Corrective Action ("PCA").16

B. Source Of Strength As indicated, the Acquisition Policy Statement drops the source of strength commitment.

C. Cross-Support The cross-support provision of the Acquisition Policy Statement only applies if the "private capital investor" owns eighty percent or more of multiple banks or thrifts. Where such common ownership is present, the "private capital investor" must pledge to the FDIC its interest in the shares of commonly owned institutions as security against any losses the FDIC might suffer as a result of the failure of any of the commonly-controlled institutions.17

D. Transactions With Affiliates Extensions of credit18 by the bank to its investors and to "affiliates"19 of those investors would be prohibited.20 "Private capital investors" must regularly report to the bank the identity of all such affiliates to enable the bank or thrift to identify those affiliates and avoid extensions of credit to them.

E. "Silo" Structures The Acquisition Policy Statement indicates that the FDIC would not approve ownership structures in which a "private capital investor" (or its sponsor) establishes multiple investment vehicles funded and apparently controlled by the "private capital investors" (or their sponsors) to acquire a bank or thrift. Apparently, the FDIC considers such structures to be evasions of bank holding company laws and regulations and is concerned that they separate ownership from control.

F. Secrecy Law Jurisdictions Generally, "private capital investors" from "secrecy law jurisdictions" are not permitted to bid for a failed bank. A "secrecy law jurisdiction" is one that, inter alia, precludes U.S. bank regulators (i) from garnering sufficient information to ensure compliance with U.S. laws or (ii) from obtaining information on the competence, experience, and financial condition of the investors and related parties.21 A country that

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permits off shore entities to operate shell companies would also be considered a "secrecy law jurisdiction." This could affect a PEF with a large base of non-U.S. investors. An exception is provided for the case of an investor from a secrecy law jurisdiction that is a subsidiary of a company that is subject to comprehensive consolidated supervision recognized by the Federal Reserve Board that consents to a number of promises of cooperation.

G. Continuity Of Ownership Ownership in the failed bank must be maintained for three years, as in the Proposed Guidelines. A new exception in the Acquisition Policy Statement permits the "private capital investor" to sell its interest in the acquired institution before the end of the three year commitment period where the "private capital investor" is a mutual fund.22 The three year requirement would seem to bar acquiring a failed bank, turning it around, and taking it public to raise capital within three years.

H. Special Owner Bid Limitation Investors that directly or indirectly own ten percent or more of a failed bank or thrift would not be allowed to bid on the assets or liabilities of that bank or thrift, even if such investors were not at fault for the bank's failure. Ironically, the FDIC has a statutory duty to pursue the "least cost resolution" of a failed bank or thrift, and it is conceivable that this aspect of the policy could, at least in a rare case, place the FDIC in violation of that statutory duty.23 Also ironically, a manager that caused a bank to fail would not be precluded by the Acquisition Policy Statement from bidding if he or she owned less than ten percent of the bank.24

I. Disclosures "Private capital investors," and their investors as well, would be required to disclose information to the FDIC as the FDIC deems necessary. Such information would include information about the size of the capital funds, diversification, return profile, marketing documents, management team, and business model. Such disclosures would remain confidential.

Footnotes

1. See Final Statement of Policy on Qualifications for Failed Bank Acquisitions, available at http://www.fdic.gov/news/board/Aug26no2.pdf. The Acquisition Policy Statement was approved on August 26, 2009.

2. Ordinarily, when a bank fails, the FDIC tries to sell its assets and deposit liabilities - these transactions are generally referred to as "Purchase and Assumption," or "P & A" transactions by the FDIC. See, e.g., Purchase and Assumption Agreement, Whole Bank, Among FDIC, Receiver of Washington Mutual Bank, Henderson, NV, FDIC, and JPMorgan Chase Bank, N.A. (September 25, 2009), available at http://www.fdic.gov/about/freedom/Washington_Mutual_P_and_A.pdf. To acquire deposit liabilities, a buyer needs to have a bank or thrift charter authorizing it to take deposits. For those deposits to be insured by the FDIC, the buyer either must be itself a bank or thrift with FDIC insurance or it must apply to the FDIC for deposit insurance. If a parent company will "control" the bank or thrift taking the deposits, the controlling company must receive prior approval from the Board of Governors of the Federal Reserve System (as to a bank) or the Office of Thrift Supervision (as to a thrift). Any non-company (such as an individual) acquiring "control" of a bank or thrift requires the prior approval of the primary federal regulator of the bank or thrift.

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3. See Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions 74 Fed. Reg. 32932 (July 9, 2009); FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank Acquisitions, PR-112-2009 (July 2, 2009), available at http://www.fdic.gov/news/news/press/2009/pr09112.html.

4. Our previous Memorandum on Private Equity Investments in Troubled Banks is available at http://www.cadwalader.com/assets/client_friend/071409PEInvestmentsInTroubledBanks.pdf.

5. The Director of OTS, along with the Comptroller of the Currency, who directs the Office of the Comptroller of the Currency ("OCC"), sit on the Board of Directors of the FDIC alongside the FDIC Chairman, FDIC Vice Chairman, and FDIC Director. See generally, 12 U.S.C. s. 1812(a).

6. When disposing of assets in a receivership, the FDIC generally is required to: (i) maximize the net present value obtained in a sale of receivership assets; (ii) minimize the overall loss the pool of receivership assets experiences; (iii) treat those bidding for receivership assets fairly; (iv) prevent discrimination against bidders; and (v) maximize the availability of low/middle income housing. The FDIC also must observe certain procedural guidelines that seek to minimize the adverse impact the FDIC's actions may have on individuals or other financial institutions in the community of the failed institution. 12 U.S.C. s. 1821(d)(13)(E). It is interesting to consider whether the Acquisition Policy Statement has the effect of violating the FDIC's statutory obligation to "ensure adequate competition and fair and consistent treatment of [bidders]."

See also Section IV.H of this memorandum as to whether certain other aspects of the Acquisition Policy Statement might be in conflict with existing FDIC policy.

7. Loss sharing is a means for the FDIC essentially to delay payment of the "sweetener" that induces an acquiring institution to take over the failed institution. Loss sharing has been structured variously as: (i) a "put" option permitting the acquirer to return riskier assets to the FDIC within a specified timeframe; and (ii) arrangements whereby the FDIC absorbs a portion of losses on specified pools of assets. See generally MANAGING THE CRISIS: THE FDIC AND RTC EXPERIENCE Ch. 7 (FDIC 1997), available at http://www.fdic.gov/bank/historical/managing/history1-07.pdf.

8. The FDIC is still uncomfortable with PEF bidders, as it continues to express concern with the "relatively new phenomenon of private capital funds joining together to purchase the assets and liabilities of failed banks and thrifts where the investors all are less than 24.9 percent owners but supply almost all of the capital to capitalize the new depository institution."

9. CAMELS ratings are the confidential composite ratings given by regulators to a bank after they have examined the bank's capital, asset quality, management, earnings, liquidity, and sensitivity to market risk, on a 1 to 5 scale, 1 being highest.

10. See our comment in footnote 13 below regarding the extent to which de novo banks are subject to more frequent examination than seasoned banks and required to maintain heightened capital levels.

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11. These eight requirements are discussed in greater detail in our earlier memo on Private Equity Investments in Troubled Banks. See supra note 4.

12. A leverage ratio requires an amount to be held as a simple flat percentage of a bank's total assets, whereas the common equity ratio is a percentage of risk-based assets. Requiring a high leverage ratio effectively penalizes banks holding large amounts of relatively riskless liquid assets, such as cash or Treasuries.

13. The FDIC has recently issued new guidance that extends from three years to seven years the "de novo period" during which a newly chartered banking institution must maintain heightened capital levels. See Enhanced Supervisory Procedures for Newly Insured FDIC- Supervised Institutions FIL-50-2009 (August 28, 2009), available at http://www.fdic.gov/news/news/financial/2009/fil09050.html.

14. Tier 1 common equity is Tier 1 capital minus perpetual preferred stock, minority interests, and certain restricted core capital elements. See 12 C.F.R. s. 325.2(v).

15. The term "well capitalized" is defined at 12 C.F.R. s. 325.103(b)(1) to mean having (1) a total risk-based capital ratio of ten percent (10%) or more, (2) a Tier 1 risk-based capital ratio of six percent (6%) or more, (3) a leverage ratio of five percent (5%) or more, and (4) no capital directive from the regulators. The remaining four capitalization categories are: adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. 12 U.S.C. s. 1831o(b).

16. 12 U.S.C. s. 1831o(b); 12 C.F.R. s. 325.103. See supra note 4. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Pub. L. No. 102-242, 105 Stat. 2236, mandated that banking regulators take "prompt corrective action" when an institution's capitalization rating falls below the top two capitalization categories. PCA may include an increase in the monitoring of the institution, requiring the institution to raise more capital, requiring the institution to merge with a more highly capitalized institution, or closure of the institution. The PCA provisions are intended to bring about the resolution of a depository institution at the lowest possible overall cost to the DIF.

17. The cross-support requirement derives from the FDIC's authority to assess commonly controlled insured financial institutions for a failure within the group. 12 U.S.C. s. 1815(c)(5). Such assessments are intended to recover from affiliated institutions the cost to the DIF of the failure of an affiliated bank. This authority is meant to deter a bank from shifting assets among affiliates in anticipation of the failure of an institution within a single group. Ironically, the FDIC's exercise of cross-guaranty authority has in the past itself caused the failure of banks - e.g., Southeast Bank of West Florida, a sister bank of Southeast Bank, N.A. (closed on September 19, 1991), was assessed for the failure of Southeast Bank, N.A., and thereafter failed.

18. The term "extension of credit" is defined as in Federal Reserve Regulation W, 12 C.F.R. 223.3(o).

19. While affiliate transaction statutes and regulations to which most banks are subject define the term "affiliate" to mean 25% or more ownership of a class of voting securities, the Final Policy Statement defines "affiliate" to include any firm in which the investor

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directly or indirectly owns 10% of the equity and has maintained that ownership for at least 30 days.

20. Conventional restrictions on transactions between banks and their affiliates do not completely prohibit such transactions, but rather limit them, impose special collateral requirements, and require them to be on non-preferential terms and conditions.

21. The Acquisition Policy Statement defines a "secrecy law jurisdiction" as a "country that applies a bank secrecy law that limits U.S. bank regulators from determining compliance with U.S. laws or prevents them from obtaining information on the competence, experience and financial condition of applicants and related parties, lacks authorization for exchange of information with U.S. regulatory authorities, does not provide for a minimum standard of transparency for financial activities, or permits off shore companies to operate shell companies without substantial activities within the host country."

22. The carve out of an exception for mutual funds is a clear acknowledgement of the broad scope of the definition of "private capital investor." The mutual fund carve-out is available to open-ended investment companies registered under the Investment Company Act of 1940 that issue redeemable securities that allow investors to redeem on demand.

23. 12 U.S.C. s. 1823(c)(4); 12 C.F.R. 360.1. FDICIA amended the Federal Deposit Insurance Act ("FDIA"), Pub. L. No. 81- 797, 64 Stat. 873, to require least cost resolution. The only exception to the "least cost resolution" requirement is where a systemic risk to the financial system exists. 12 U.S.C. s. 1821(c)(4)(G). Of course, it would be a stretch for the FDIC to argue that permitting PEF entry into the banking industry would cause a "systemic risk," and thus that excluding PEFs from bidding on failed institutions is justifiable regardless of the increased cost to the DIF.

24. Cf. 12 U.S.C. s. 1823(k)(5), which prohibits the FDIC from providing assistance to a failing depository institution when management of the institution (i) has failed to manage the institution in compliance with rules and regulations and (ii) has engaged in certain abusive practices with respect to the institution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr. Julius Loeser Cadwalader, Wickersham & Taft LLP

One World Financial Center New York NY 10281

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Preparing for a major bank shakeout Rising failures and a weak economic recovery could accelerate a decades-long trend towards fewer, bigger banks. By Colin Barr, senior writer Last Updated: August 28, 2009: 3:45 AM ET

NEW YORK (Fortune) -- The problem bank list is just about the only part of the industry that's growing right now.

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The sector's financial problems, outlined by regulators in excruciating on Thursday, could speed a shakeout that already has slashed banks' ranks by almost half over two decades.

"We could end up with a couple thousand fewer banks within a few years," said Terry Moore, managing director of consulting firm Accenture's North American banking practice. "You could say we're overbanked right now."

The Federal Deposit Insurance Corp. said Thursday that U.S. banks lost $3.7 billion in the second quarter. Bad loans are growing faster than institutions are setting aside in reserves for future losses, while total lending has declined for four straight quarters.

The list of troubled institutions -- those deemed to pose at least a "distinct possibility" of failure -- rose by more than a third during the second quarter, to 416. The FDIC doesn't reveal the names of banks on the problem list.

Anticipating rising costs of dealing with troubled banks, the FDIC on Wednesday formalized new rules for private equity firms and other investors buying failed banks. There has been a heavy trade in failed banks lately, given that 81 institutions have been closed in 2009 and dozens more are expected to be shut over the next year.

The quick pace of failures has already rewarded some prescient bankers.

"We were preparing for this moment for maybe two and a half years," said Norman C. Skalicky, CEO of Stearns Bank, a closely held St. Cloud, Minn., institution that has acquired four banks from the FDIC this year. "The biggest mistake we made was not getting ready a year earlier."

Bank failures aren't the only driver of consolidation. While bank mergers fell to 89 in the first half of 2009 from their recent peak of 153 in the first half of 2007, growth-minded banks such as First Niagara (FNFG) in Lockport, N.Y., are looking for opportunities to expand.

"We are always working with our eyes wide open," said John Koelmel, CEO of First Niagara, which last month announced the acquisition of Harleysville National (HNBC) of Philadelphia. "Our shopping cart isn't full."

The shopping spree ahead -- Moore says the U.S. could lose 2,000 banks by the end of 2012 -- is likely to claim some well known regional banks.

Colonial BancGroup of Alabama and Guaranty Financial Group of Texas have failed over the past month. Chicago condominium lender Corus Bankshares (CORS) has been on death watch for some time.

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Judging by stock prices, investors are still questioning the prospects of KeyCorp (KEY, Fortune 500) of Cleveland, Marshall & Ilsley (MI) of Milwaukee and Regions Financial (RF, Fortune 500) of Alabama.

But the bulk of consolidation is likely to come at the expense of smaller banks, whose numbers have been dwindling for decades in the face of deregulation and technological advances that disproportionately aided bigger competitors.

The number of banks with less than $100 million in assets has dropped by more than 5,000 since 1992, according to a study released this year by banking consultancy Celent.

Even more pronounced has been the small banks' loss of deposits. Small banks' share of the U.S. deposit market plunged to 2% last year from almost 13% in 1992, according to Celent data.

"The world is only getting more complex," Celent analyst Bart Narter wrote, noting ever-increasing regulatory paperwork and new businesses such as Internet banking. "Small banks are overwhelmed."

That said, small banks aren't going away. Policymakers such as FDIC chief Sheila Bair have emphasized their importance in lending to small businesses, and studies have found they tend to pay better deposit rates than bigger rivals. The FDIC on Wednesday extended a program that some community bankers credit with helping them to compete with the biggest banks.

And the smallest banks have generally performed better during the financial crisis than their bigger rivals. Banks with less than $100 million in assets make up more than a third of the FDIC's problem bank list, but have accounted for just 11 of 81 bank failures so far this year.

Like their bigger rivals, community banks are now enjoying stronger profit margins in the second quarter, as the spread between the rates banks pay depositors and those they charge to lend to borrowers widened.

"This is good news for community banks, since three-fourths of their revenues come from net interest income," Bair said Thursday.

First Published: August 27, 2009: 2:34 PM ET

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Reuters FDIC soften bank investment restrictions Karey Wutkowski WASHINGTON Wed Aug 26, 2009 7:20pm EDT Related News Wed, Aug 26 2009

WASHINGTON (Reuters) - U.S. banking regulators partially retreated from a much-criticized proposal to impose new rules on private equity investment in troubled banks, aiming to encourage responsible investment in distressed banks. The 4-1 vote by the Federal Deposit Insurance Corp board was a partial victory for potential investors and some regulators who had warned that an initial proposal unveiled in July threatened to scare away much-needed capital.

The regulators lowered capital requirements and dropped or modified measures that could have required investors to kick in more capital after their initial investment. The rules will be further reviewed in six months.

Even so, FDIC Chairman Sheila Bair said the modified rules could depress investor interest in failed banks, a view shared by a private equity industry group.

"The FDIC recognizes the need for additional capital in the banking system," Bair said, but added: "We do want people very serious about running banks."

U.S. bank regulators are increasingly looking to nontraditional investors -- such as private equity groups and international banks -- to nurse failed banks back to health as the number of insolvent institutions continues to rise, draining the FDIC's deposit insurance fund.

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.

The Private Equity Council said the rules, at a minimum, would reduce the value of any bids for failed banks, increasing resolution costs for the FDIC.

"Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise," the group said.

Josh Lerner, a Harvard Business School professor, said the FDIC was walking a tightrope given that there was a clear need for outside money due to the number and cost of bank failures.

"At the same time there's clearly a sense of reluctance to give too good a deal to the private equity guys," he said.

CAPITAL RATIOS

A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 percent, from the 15 percent Tier 1 leverage ratio previously proposed.

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One private equity executive said their analysis was that on a typical $10 billion bank, a private equity bid would be put at around a $1 billion disadvantage because of the 10 percent capital level.

The regulators also dropped a requirement that investors serve as a "source of strength" for the bank they buy, which critics said could have put them on the hook for more capital if the institution struggled.

A cross-guarantee proposal -- meaning if an investor owns more than one bank, the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered -- was modified to only include banks that had an 80 percent common ownership.

The FDIC kept a requirement that private equity investors maintain their ownership of a bank for at least three years, unless they get prior approval by the FDIC.

BankUnited Chief Executive John Kanas said it was clear regulators were holding private equity to a higher standard than other investors.

"And it will probably result in private equity adjusting their prices downward accordingly for these transactions," Kanas told Reuters. Earlier this year he led a consortium that included private equity giants Blackstone Group, Carlyle Group and WL Ross & Co in taking over failed Florida lender BankUnited.

The dissenting vote was from acting director of the Office of Thrift Supervision, John Bowman, who said the revised policy was overly broad and imprecise. He also expressed unease at singling out private equity investors as a separate group.

Voting for the rules were Bair, FDIC Vice Chairman Martin Gruenberg, FDIC Director Thomas Curry and Comptroller of the Currency John Dugan.

Dugan had raised concerns in July about the initial version of the rules, but said he supported the new guidelines, describing them as "significantly improved."

The FDIC on Wednesday also voted to extend by six months a program that guarantees transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

"It has improved overall liquidity throughout the banking system," Bair said.

The agency also said it would seek comment on whether to phase in the impact on capital requirements of an accounting change that will force banks to bring $1 trillion of off-balance sheet assets back on their books.

(Reporting by Karey Wutkowski and Steve Eder; Additional reporting by Paritosh Bansal and Megan in New York; Editing by Tim Dobbyn and Simon Denyer)

FDIC to soften stance, luring private capital Paritosh Bansal andMegan Davies NEW YORK Wed Aug 26, 2009 4:09pm EDT Related News Wed, Aug 19 2009

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NEW YORK (Reuters) - U.S. regulators are likely to back down from the tough stance they took a month ago on rules for auctions of troubled banks, which could clear the way for more private equity bidders to come back into the game. The Federal Deposit Insurance Corp (FDIC), voting on final guidelines on Wednesday, is still likely to make it hard for private investors to buy failed banks, but is seen rolling back some of the most controversial measures following vociferous complaints from the industry.

Regulators are trying to reach a middle ground with the private equity industry because it represents a crucial source of capital as the United States tries to resuscitate its struggling banking industry.

"The potential pool, from us and other private equity firms, could be a hundred billion dollars -- its a huge amount of money that's at stake," billionaire investor Wilbur Ross told Reuters. He estimates that up to 500 banks could fail between now and the end of 2010.

The biggest complaint from the industry has been that the proposed rules called for a Tier 1 leverage ratio -- the ratio of a bank's capital to its assets -- of 15 percent for three years, above 5 percent required of well-capitalized banks.

The FDIC may roll that back to 10 percent, two sources familiar with the process said. One of the sources said there were some questions about whether the level would be a fixed number or a range of perhaps 8 percent to 10 percent.

The sources declined to be identified because the rules are not public.

Some experts argue that even at 10 percent it will be more expensive for private equity to buy a failed bank than for a strategic bidder, such as a well-capitalized large bank.

"I don't think an imposition of 10 percent will keep people like us from bidding," BankUnited Chief Executive John Kanas told Reuters. "But having a higher level of capital like that would be reflected in our bid."

Kanas led a consortium that included private equity giants Blackstone Group, Carlyle Group and Ross to take over failed Florida lender BankUnited earlier this year.

Kanas did not expect the FDIC to want to change the terms of the BankUnited deal in light of the new guidelines, but hold them to the new standard in the future.

The FDIC, led by Chairman Sheila Bair, regulates more than 8,000 banks and insures their deposits. It has said it needs to issue tough guidelines to ensure that private equity groups are interested in nursing ailing banks back to health.

"The only way that private equity gets any bank ... is by bidding more than the commercial banks would bid," said Ross. "There's really no need to have draconian rules when the process already calls for competitive bids."

RULES ROLLBACK

Another guideline causing concern among the private equity industry says investors would be expected to serve as a "source of strength" for the bank they buy, which could put them on the hook for more capital if the institution struggles.

However, the FDIC may make it such that the holding company can raise capital, so that it doesn't necessarily have to come from the investors themselves, the first source said.

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A cross-guaranty proposal -- meaning if a company owns more than one bank the FDIC can use the assets of the healthier bank to cut losses from the one that's faltered -- could also be modified, both sources said.

A guideline, which calls for a minimum holding period of three years for the investments, is less likely to change, both sources said.

FDIC spokesman Andrew Gray said, "We have taken the feedback of all stakeholders into account as we have worked to craft a final rule."

HEAVIER BURDEN

Despite a marked pull-back from the FDIC's initial proposals, the new rules will impose a heavier burden on private equity investors. But they may still find they can achieve high enough returns to make investments in U.S. banks worthwhile.

Indeed, the threat of tough rules did not stop private equity investors from bidding on FDIC-run auctions.

An auction for the assets of failed Texas lender Guaranty Financial Group this month drew a bid from at least one private equity consortium, which included Blackstone, Carlyle and TPG. A U.S. unit of Spain's BBVA won the auction.

The FDIC is correct in toeing a hard line, said John Chrin, a former JPMorgan Chase & Co investment banker who is now executive-in-residence at Lehigh University's College of Business and Economics

"They (FDIC) staked out a position that was probably overly conservative to start. The PE firms wanted to be where the industry is," said Chrin, referring to the lower capital requirements for well capitalized banks. "And you wind up settling in between."

(Reporting by Paritosh Bansal and Megan Davies, additional reporting by Karey Wutkowski in Washington; Editing Bernard Orr)

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FDIC may ease private equity buys of failed banks

FDIC may temper proposed restrictions on private equity firms seeking to buy failed banks

• By Marcy Gordon, AP Business Writer On Thursday August 20, 2009, 3:29 pm

WASHINGTON (AP) -- Federal regulators appear ready to temper proposed restrictions on

private equity firms seeking to buy failed banks, as the government seeks to lure more potential

purchasers amid a mounting tally of collapsed financial institutions.

The Federal Deposit Insurance Corp., which proposed the new policy last month, is expected to

make the changes when its board meets on Aug. 26 and publicly adopts final guidelines, people

familiar with the issue said Thursday.

Private equity firms, which generally buy distressed companies and then resell them after about

three to five years, would face strict capital and disclosure requirements under the FDIC proposal.

Seventy-seven banks already have failed this year amid rising loan defaults spurred by tumbling

home prices and spiking unemployment, costing the deposit insurance fund -- which is financed

by assessments on U.S. banks -- billions of dollars. The FDIC, which seizes the banks and seeks

buyers for their branches, deposits and soured loans, has said the private equity industry can

play a valuable role in injecting sorely needed capital into the banking system.

Still, FDIC Chairman Sheila Bair said the proposed restrictions were intended to provide

"essential safeguards" in light of concerns over private equity firms' ability to apply adequate

capital and management skill to banks they buy. "We are trying to find the best way to have a

balanced approach," Bair said in early July when the policy was opened to public comment.

FDIC spokesman Andrew Gray declined to comment Thursday on what action the agency might

take on the guidelines.

Industry interests say the FDIC proposal tipped the balance in a way that discourages private

equity firms from buying banks. And two of the FDIC board members -- Comptroller of the

Currency John Dugan and John Bowman, acting director of the Office of Thrift Supervision --

warned publicly that it may be overly restrictive.

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The regulators "are interested in anything that can help them get rid of failed banks and failed

banks' assets," said Chip MacDonald, an attorney at Jones Day in Atlanta whose clients include

some private equity firms.

But the FDIC policy in its current form "doesn't fly economically" for private equity buyers, he said.

Lawrence Kaplan, a former senior attorney at the Office of Thrift Supervision, said it's an

interesting dilemma for the FDIC. "Chances are they're going to temper that," he said.

The most notable requirement is for private equity investors to maintain a robust amount of cash

in the banks they acquire, keeping them at a minimum 15 percent capital leverage ratio for at

least three years. Most banks have lower leverage ratios -- a key measure of financial strength

that gauges an institution's capital divided by its assets. Banking giant Citigroup Inc., for example,

had a reported ratio of around 9 percent as of June 30.

That mandate could be reduced to 10 percent or lower in the final rules, some people familiar with

the discussions said. Kaplan suggested that instead of a 15 percent minimum, the required ratio

should vary based on an assessment of the risk profile of a particular bank.

Also under the proposed policy, investors would have to own the banks for at least three years

and face limits on their ability to lend to any of the owners' affiliates. That ownership period could

be substantially reduced in the final guidelines, some experts say.

The biggest bank failure so far this year came last Friday, when the FDIC took over Colonial

BancGroup Inc., a big lender in real estate development based in Montgomery, Ala. The agency

sold the bank's $20 billion in deposits, 346 branches in five states and about $22 billion of its

assets to BB&T Corp.

Colonial's failure is expected to cost the deposit insurance fund an estimated $2.8 billion. Colonial

was roughly twice the size of BankUnited FSB, a Florida thrift closed in May with $13 billion in

assets, which was sold for $900 million to a group of private-equity investors-- including the firm

run by billionaire investor Wilbur Ross -- in a rare transaction of that type by the FDIC. The

expected hit to the insurance fund from BankUnited is an estimated $4.9 billion.

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FDIC Board Approves Proposed Policy Statement on Qualifications for Failed Bank Acquisitions

FOR IMMEDIATE RELEASE July 2, 2009

Media Contact:David Barr (202) 898-6992

The FDIC Board today authorized publication of a Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions. This proposed policy statement would provide guidance to private capital investors interested in acquiring or investing in the assets and liabilities of failed banks or thrifts regarding the terms and conditions of the investments or acquisitions.

"How investments in insured depository institutions are structured is critical for the banking system as well as the FDIC," said FDIC Chairman Sheila C. Bair. "We are particularly concerned with the owners' ability to support depository institutions with adequate capital and management expertise. This proposed policy statement is intended to provide those essential safeguards. We are trying to find the best way to have a balanced approach, and we look forward to comments that can help us accomplish that."

Recently, private capital investors have indicated interest in purchasing insured depository institutions in receivership. 1 The FDIC is particularly concerned that owners of banks and thrifts, whether they are individuals, partnerships, limited liability companies, or corporations, have the experience, competence, and willingness to run the bank in a prudent manner, and accept the responsibility to support their banks when they face difficulties and protect them from insider transactions.

The FDIC has reviewed various elements of private capital investment structures and considers that some of these investment structures raise potential safety and soundness considerations and risks to the Deposit Insurance Fund (DIF) as well as important issues with respect to their compliance with the requirements applied by the FDIC in its decision on the granting of deposit insurance.

Under the proposed policy statement, the FDIC would establish standards for bidder eligibility in connection with the resolution of failed insured depository institutions, which provide for:

• capital support of the acquired depository institution; • agreement to a cross guarantee over substantially commonly owned depository

institutions; • limits on transactions with affiliates; • maintenance of continuity of ownership; • clear limits on secrecy law jurisdiction vehicles as the channel for investments; • limitations on whether existing investors in an institution could bid on it if it failed; and • disclosure commitments.

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The FDIC is keenly aware of the need for additional capital in the banking system, and the contribution that private equity capital could make to meeting this need provided this contribution is consistent with basic concepts applicable to the ownership of these institutions that are contained in our banking laws and regulations, and now summarized in the proposed Policy Statement.

One of the most important safeguard elements in the Proposed Policy Statement is the requirement that the acquired depository institution be very well capitalized at a Tier 1 leverage ratio of 15 percent, to be maintained for a period of at least 3 years, and thereafter at a "well capitalized" level.

Safety and soundness considerations may also be satisfied with a lower, but a still high level, of Tier 1 capital. Accordingly, the FDIC seeks the views of commenters on the appropriate level of initial capital that will satisfy concerns relating to both safety and soundness and the economic viability of the terms of investment in insured depository institutions.

While the issue of capital adequacy is of paramount importance, the FDIC is seeking comment on all aspects of the proposed policy statement, including nine specific questions set out in the Notice of Public Comment. Comments are due 30 days from the date of publication in the Federal Register.

# # #

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Psst! Wanna own a bit of a failed bank? With bank failures mounting, the FDIC is stuck trying to sell loans, real estate and more exotic assets like lawnmowers and even a Bentley. EMAIL | PRINT | SHARE | RSS By David Ellis, CNNMoney.com staff writer Last Updated: June 30, 2009: 4:33 PM ET

Map

Where the banks are failing Bank failures and foreclosures keep mounting View Map

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Among the many non-traditional assets regulators seized when New Frontier Bank failed was this 2003 Bentley Arnage, which was sold for $50,000 at an auction held in May.

Also put up for sale by the FDIC was this armored truck once owned by the Bradenton, Fla.-based lender Freedom Bank, which was shuttered last October. NEW YORK (CNNMoney.com) -- When New Frontier Bank failed in April, regulators failed to find a buyer, forcing the FDIC to absorb the roughly $2 billion in assets that were once owned by the Colorado-based lender.

But what the FDIC may not have anticipated at the time was that the agency would be stuck with a grab-bag of other exotic assets including a white Bentley Arnage, three lawnmowers, a Fleetwood Motor home and more than two dozen works of art, most of which reflected the bank's rural surroundings in northern Colorado.

The demise of New Frontier is just one example of the asset messes regulators are often stuck with once a bank is shuttered. At an auction held last month, regulators auctioned off a combined 300 copiers, printers and scanners that were once owned by the California mortgage lender IndyMac (IDMCQ), which collapsed last July in one of the biggest bank failures in history.

"It is just a potpourri of stuff," said Chip MacDonald, partner in the capital markets group at Jones Day, a law firm headquartered in Cleveland.

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As of the end of March, the Federal Deposit Insurance Corp. had roughly $16 billion worth of failed bank assets just waiting to be liquidated, according to an agency report published earlier this month.

But that number is poised to climb higher as more banks fail. Last Friday, regulators seized five institutions across the country, the largest one-day instance of failures in years. Experts widely believe that that hundreds more banks could fail in the years ahead as a result of the current recession, which means plenty of work for the FDIC.

When a bank fails, the FDIC typically tries to find a buyer for the deposits and branches first before. If it's unsuccessful, as was the case with New Frontier, the FDIC then looks to sell off the bank's remaining assets.

Some of that work is handled by the agency itself, but much of it is farmed out to private-firms that specialize in managing and selling assets.

Regulators have largely looked to two firms - First Financial Network and DebtX - to market existing bank loans. Next month, Boston-based DebtX will oversee an auction for nearly $67 million in non-performing agriculture, consumer and business loans that were once owned by Illinois lender Corn Belt Bank and Trust Company, which failed in February.

The agency also recently struck agreements with a trio of auctioneer firms to handle the sale of everyday items used by the bank, such as computers, desks and other office furnishings, as well as cars, boats and industrial equipment a bank might have seized from borrowers that defaulted on their loans.

Helping to manage and sell both commercial and real estate properties for the FDIC is the Florida-based asset manager Prescient and commercial real estate giant CB Richard Ellis Group (CBG, Fortune 500) .

Time is money While regulators can shut down and sell an ailing bank to a healthier institution over the course of a weekend, winding down an orphan bank can take a bit longer.

For example, regulators have had to cautiously dismantle the Atlanta-based Silverton Bank after creating a bridge bank to take over the company in early May.

Given the firm's role as a so-called "bankers' bank" providing everyday services to small-town lenders, it could take a total of five months to wind down the institution, MacDonald said, referring to the situation as "a mess."

Timing, however, can be everything when a bank fails, especially as regulators scramble to squeeze every dime out of a failed bank's remaining assets.

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Consider the case of Downey Financial (DWNFQ). Last fall, just two months before regulators seized the California-based lender, the company was shopping its twin-towered, six-story headquarters in Newport Beach for a reported $115 million.

The nearly 43,000-square-foot piece of property is still up for grabs, albeit at a deep discount. Prescient is currently asking for $59 million for the property, according to its Web site.

Bliss Morris, president and CEO of First Financial Network, a 20-year-old Oklahoma-City-based firm, said the same holds true in trying to sell loans on behalf of the FDIC -- the longer it takes to make a sale, the more likely it is that the loans will lose even more of their value.

Hoping to avoid some of those headaches, regulators have tried to forge loss-sharing arrangements with acquiring banks. Under such an arrangement, buyers agree to take on some of the bad assets in exchange for having the FDIC absorb some losses -- typically over the next five to 10 years.

Regulators brokered such a deal with a consortium of private equity firms in May before authorities shuttered the Florida lender BankUnited FSB.

"The agency works very hard to sell as many assets they can with the deposit franchise," said Robert Hartheimer, a Washington, D.C.-based consultant and adviser to Promontory Financial Group, who once served as director of the FDIC division charged with overseeing bank failures.

Competing with the vultures Even as such moves may soften the blow to the FDIC's deposit insurance fund, it is clear that the agency needs to get the maximum possible value it can from failed bank assets.

In the first quarter, the value of the deposit insurance fund fell by $4.3 billion, or nearly a quarter of its value, to just over $13 billion.

Luckily, the demand for failed bank assets have been robust by all accounts.

Auctions of the more mundane items like office furniture have attracted everyone from fellow bankers to a school administrator in Atlanta who was looking to add new desks for her growing student population.

"Everything we have attempted to sell has been sold," said Rick Levin, president of the Chicago-based firm Rick Levin & Associates, one of the auction firms assisting the FDIC with its asset sales. "We are finding strong demand."

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And while the bidding for real estate and loans sales has been dominated by institutional investors so far, there are indications that average Joes are also starting to express interest in scooping up toxic assets.

Bill Bartmann, a former distressed bank debt investor who recently published a book entitled "Bailout Riches" aimed at teaching people how to profit from buying bad loans on the cheap, notes several of his students have invested as little as $5,000 in loans once owned by failed banks.

While such investments come with plenty of risk, it stands to reason that individual investors could generate similar returns to "vulture investors" who are gambling millions of dollars on the possibility that there is still some value in those loans.

"It doesn't always take a Morgan Stanley or Goldman Sachs to come to the table," he said. "This really is an opportunity."

First Published: June 30, 2009: 3:53 PM ET

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Business

Treasury’s Got Bill Gross on Speed Dial By DEVIN LEONARD Published: June 20, 2009

Newport Beach, Calif.

Stephanie Diani for The New York Times

Appearing on TV and bending the ear of the White House, Bill Gross of Pimco has emerged as one of the nation's

most influential financiers.

Related

Times Topics: William H. Gross

Jim Bourg/Reuters

Timothy F. Geithner, the treasury secretary, wants investors like Pimco to work with the government to buy some

bank debt.

Every day, Bill Gross, the world’s most successful bond fund manager, withdraws

into a conference room at lunchtime with his lieutenants to discuss his firm’s

investments. The blinds are drawn to keep out the sunshine, and he forbids any

fiddling with Blackberry’s or cell phones. He wants everyone disconnected from the

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outside world and focused on what matters most to him: mining riches for his clients

at Pimco, the swiftly growing money management firm.

Mr. Gross, 65, has long been celebrated for his eccentricities. He learned some of his

lucrative investing strategies by gambling in Las Vegas. Many of his most inspired

ideas arrived while he was standing on his head doing yoga. He knows he has to be

well dressed for client meetings or television — but instead of keeping his Hermès

ties neatly knotted, he drapes them around his neck like scarves so he can labor with

his collar open.

And with the collapse of Wall Street, Mr. Gross has emerged as one of the nation’s

most influential financiers. His frequent appearances on CNBC draw buzz, as do his

wickedly humorous monthly investing columns on the Pimco Web

site. Treasury secretaries call him for advice.Warren E. Buffett, the Berkshire

Hathaway chairman, and Alan, the former Federal Reserve chairman, sing his

praises.

“He’s a very individualistic person. He doesn’t come at analysis or investment

judgment in the words, terminology or ambience that I have been used to over the

decades,” Mr. Greenspan says. “That may be the secret of his success. There is no

doubt there is an extraordinary intellect there.” Mr. Greenspan, it should be noted,

now works for Pimco as a consultant.

Amid all of this, Mr. Gross and his firm are trying to shape the government’s

response to the economic crisis. He is one of the most fervent supporters of the

Obama administration’s plan to enlist private investors to help bail out the nation’s

ailing banks and try to revive the economy.

That effort, known as the Public-Private Investment Program, or P.P.I.P., has gained

little traction so far. But Mr. Gross has energetically defended its architect, Treasury

Secretary Timothy, against critics like the New York University economics professor

Nouriel Roubini and the New York Times columnist Paul Krugman — both of whom

argue that the strategy is flawed and that it would be best for the government to

temporarily nationalize so-called zombie banks to prevent a repeat of the Great

Depression.

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Such nationalization, Mr. Gross insists, would be an unmitigated disaster. “There are

two grand plans,” he said this spring at a meeting of his firm’s investment

committee. “One is the Krugman-Roubini plan. They think the banks have so much

garbage they are beyond hope. The other side is the administration’s side. That’s the

one we’re on. If the other side should ever gain credence, then we’ll have something

to worry about.”

Mr. Gross is hardly a disinterested observer. Pimco, owned by the German

insurer Allianz, is jockeying to be picked by Mr. Geithner to relieve the likes of Bank

of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage

debt so they can start lending freely again. Mr. Gross calls the plan a “win-win-win”

for the banks, taxpayers and Pimco investors.

The government is planning to announce soon which money managers will

participate. A spokesman for the Treasury Department would not say whether Pimco

would be one of them.

IN many ways, it is perfectly logical for the White House to turn to someone like Mr.

Gross at such a time. Few investors understand the mortgage market better. As co-

chief investment officer, he personally manages Pimco’s flagship, the Total Return

fund, which has $158 billion in assets. As of the end of May, he had invested 61

percent of the fund’s money in mortgage bonds.

Mr. Gross has always been partial to mortgage bonds. And why not? He has done

fabulously well with them. In an October 2005 letter to investors, he made one of the

most prescient calls of the last decade, warning of the looming subprime mortgage

crisis. Almost everybody ignored him. Today, they wish they hadn’t.

When the housing bubble burst and the financial markets fell apart, investors lost

billions of dollars. Not Mr. Gross’s clients. Class A shares of the Total Return fund,

for individual investors, were up 4.3 percent in 2008, or nine percentage points

ahead of comparable bond funds, according to Morningstar; this year through

Thursday, the shares were up 5.4 percent.

In the midst of an economic crisis, those numbers are impressive. So is the longer-

term record: In the 10 years through Thursday, the fund had an annualized return of

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6.42 percent, beating its benchmark by 0.54 percentage points, according to

Morningstar.

That’s one of the reasons the government has courted him closely. Last fall,

the Federal Reserve Bank of New York, run at the time by Mr. Geithner, hired Pimco

— along with BlackRock, Goldman Sachs and Wellington Management — to buy up

to $1.25 trillion in mortgage bonds in an effort to keep interest rates from

skyrocketing.

Last December, when it was pressing Bank of America to complete its ill-fated

acquisition of Merrill Lynch, the Federal Reserve also looked to Pimco for advice.

According to recently released messages that Fed staff members sent one another

that month, Pimco evaluated the two banks and concluded that Merrill wouldn’t

survive without a capital infusion or additional government aid.

Today, Mr. Gross is eager to buy the same subprime loans he once refused to touch,

as part of the Treasury’s distressed-asset initiative. After all, the thinking goes, if

anybody can figure out how much all this debt is worth, it’s Pimco. But Pimco’s

involvement in so many aspects of the bailout has made many other financiers and

analysts uncomfortable. They say its proximity to the Treasury Department and the

Fed may allow it to reap billions of easy dollars through federal contracts and

preferential investment opportunities.

A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy

mortgage securities on its behalf, when the firm is already a huge buyer and seller of

the same bonds? “That’s the equivalent of a no-bid contract in Iraq,” fumes Barry

Ritholtz, who runs an equity research firm in New York and writes The Big Picture, a

popular and well-regarded economics blog. “It’s a license to steal.”

(Page 2 of 6)

No one, of course, has actually accused Pimco of theft. But there is a larger question:

Whose interests is the firm looking out for in the bailout? Money managers, after all,

have a legal obligation — a fiduciary responsibility — to put the interest of their

investors before anyone else. Even Mr. Gross acknowledges that Pimco’s interests

won’t always be aligned with those of the government.

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Chip Somodevilla/Getty Images

Warren E. Buffett, right, wrote to Henry M. Paulson Jr. last year to say Pimco should be in charge of any effort to

buy the securities that were drowning Wall Street.

Related

Times Topics: William H. Gross

Phil McCarten/Reuters

Mohamed el-Erian, C.E.O. of Pimco, didn't initially get much traction with his plan for a public-private partnership to

buy distressed debt, but the Treasury later unveiled a similar proposal.

Mr. Gross points out that he has never even met Mr. Geithner. For its part, the

Treasury Department plays down Pimco’s influence. “We speak with a number of

market participants and believe seeking out a diversity of perspectives is critical to

our efforts,” says Andrew Williams, a spokesman for the department. He says the

Treasury takes conflicts of interests “very seriously in all cases.”

Mr. Gross is well aware of the criticism that has been directed at Pimco. During an

interview at its headquarters in Newport Beach, Calif., sitting at his horseshoe-

shaped desk on its 4,200-square-foot trading floor overlooking the Pacific Ocean, he

brings up the topic of perceived conflicts of interest himself.

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He almost never personally buys and sells bonds. Pimco has dozens of traders who

do this for him here. “There’s the mortgage desk over there,” he says, pointing to a

group of well-scrubbed young people hunched over computers. “We’ve been buying

some mortgages this morning. That’s our baby, so to speak. That’s our bag.”

He immediately adds that this mortgage trading operation is completely separate

from the one on the floor below, where traders are working on behalf of the Fed. He

says he can’t even visit that floor himself anymore without a company lawyer at his

side. The last time he did was in December, when he wished the traders happy

holidays.

“I said, ‘Merry Christmas,’ ” Mr. Gross recalls. “The lawyer said, ‘Mr. Gross says

Merry Christmas.’ Right then and there, I knew that communications were basically

severed. That’s the way the Fed wants it.”

He says he assumes that Pimco traders working on behalf of the government don’t

talk to their peers trading for Pimco’s own accounts. Then again, he said he doesn’t

know for sure what happens after hours.

“I don’t drink beer with these guys; I have no idea what happens in the privacy of

their own homes,” he says. He says that when he encounters traders working for the

Fed outside the office, he doesn’t talk to them.

“I pass some of them on the way to the lunch shop,” he says. “I just sort of wave. I

don’t know what to do.”

MR. GROSS is fond of saying he is the antithesis of a Wall Street “alpha male.” He is

every bit the Southern Californian, with longish hair and a laid-back attitude. Most

Wall Street executives won’t talk to a reporter without a public relations person

hovering nearby. Even then, they can be disappointingly bland. No one would ever

say such a thing about Mr. Gross. He approaches an interview is almost like a

therapy session; it is a chance for him to make confessions.

“I’ll tell you an interesting story,” he says at one point. “I shouldn’t, but I will. It’s like

I’m taking truth serum every time I do this.”

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The tale is about “a very childish and immature” e-mail message that he sent Don

Phillips, a managing director of Morningstar, the mutual fund research company,

when Morningstar didn’t select him as its fixed-income fund manager of the year in

2008. It is an intriguing story. But it’s nowhere near as interesting as what he has to

say about Pimco’s role in the bailout.

He sounds genuinely pained by the economic collapse. “There was always a big part of me that thought the Depression was just something from my old American Heritage history books,” he says. “I thought: ‘This stuff can’t happen really. I mean, this is just for the economic philosophers and the paranoid worriers.’ Then, in the last 6 to 12 months, you go, ‘God, this just might happen!’ ”

Published: June 20, 2009

(Page 3 of 6)

With the fate of the largest banks still uncertain, a heated debate continues about

how to fix the problem. Mr. Geithner wants to enlist money managers like Pimco to

buy distressed bank assets with financial backing from the government. That way,

his supporters argue, they can offer such generous prices that banks can disgorge the

assets without too painful a hit.

Related

Times Topics: William H. Gross

But proponents of bank nationalization say the Treasury’s plan won’t work because

some banks can’t afford to take any losses on asset sales. This camp believes

nationalization is the best path because it will let the government clean up banks’

balance sheets and restore their health.

Mr. Gross argues that this would completely destabilize the financial markets. “If you

thought Lehman Brothers was a mistake, just stand by and see what nationalizing

Citi or B.of A. would do,” he argued in one of his monthly letters to Pimco investors.

His mood brightens when he talks about how much money Pimco could reap by

participating in the Geithner plan. No wonder: the terms are deliciously favorable for

participants selected as fund managers. Money managers like Pimco would be

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expected to raise at least $500 million from their clients. The Treasury would match

that with taxpayer dollars. Then Pimco and the Treasury would create a jointly

owned fund of at least $1 billion that would buy distressed mortgage bonds.

Government largess doesn’t stop there. The fund will be eligible for low-interest

financing from both the Treasury and the Fed that analysts at Credit Suisse First

Boston estimate could be as high as four times the total equity in the fund. So if

Pimco ponied up $500 million, the fund that it manages could borrow $4 billion.

Pimco would then negotiate with banks to buy their wobbly mortgage-backed

securities. Mr. Gross says that some of these securities pay an interest rate as high as

14 percent and that even if default rates were 70 percent, Pimco and the government

would still make a 5 percent return after covering their negligible borrowing costs.

That means the government-Pimco partnership could make at least $250 million in a

year on a $5 billion investment fund. Of that amount, Pimco would get $125 million

— a 25 percent return on its original investment.

But here’s the part that makes Mr. Gross salivate. If things go badly, the government

is responsible for repaying all that debt. “It’s just like in blackjack,” he says. “That

puts the odds in your favor. If you don’t bet too much and if you stay at the table long

enough, the odds are high that you are going to go home with some extra money in

your pocket.”

Indeed, for all of Mr. Gross’s anguished talk about the crisis, there’s no escaping the

fact that Pimco isn’t exactly suffering. In November, the Total Return fund became

the world’s largest mutual fund with $128.4 billion in assets, according to

Morningstar. Since then, its assets under management have climbed to $158 billion.

The firm once had trouble luring prospective employees to Newport Beach. Now

Pimco is being deluged with résumés.

Meanwhile, some of the most powerful people in the nation call Mr. Gross for advice.

“Paulson will call, Geithner will call, and I’ll be like, ‘Yabba-dabba’ or ‘Blah-blah-

blah,’ ” he says with a measure of self-deprecation — and an equal dose of pride. “I

turn into a walking, talking idiot.”

Mr. Gross has been through crises before. He nearly died — and briefly lost part of

his scalp — in 1966 when he crashed his car while making a doughnut run for his

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fraternity brothers at Duke University. He spent much of his senior year recovering

in the hospital. He also became obsessed with blackjack after reading “Beat the

Dealer: A Winning Strategy for the Game of Twenty-One,” by Edward O. Thorp,

an M.I.T. mathematics professor (who is now a very successful hedge fund manager).

After he got his diploma, Mr. Gross hopped a freight train to Las Vegas with $200

sewed into his pant leg. He played blackjack for 16 hours a day. “After a while it gets

pretty boring and pretty stinky,” he recalls. “People lose money. They don’t win it.

You’re just watching the dealers.”

Even so, in four months, he turned $200 into $10,000 and used his winnings to pay

for his studies toward an M.B.A. at the University of California, Los Angeles. He

thought he could apply the lessons learned at the blackjack table to the stock market.

After getting the degree, he called all the big Wall Street brokerage firms. Nobody

called him back.

FINALLY, his mother showed him a classified ad for a junior credit analyst in the

bond department at the Pacific Investment Management Company, a subsidiary of

Pacific Mutual Life.

Published: June 20, 2009

(Page 4 of 6)

Although Mr. Gross had no interest in bonds, he took the job as a steppingstone to

stock-picking. Back then, the bond market was a sleepy corner of the financial world.

Mr. Gross’s job was to make sure that Pimco avoided buying bonds from companies

that might go belly-up and burn their creditors.

Related

Times Topics: William H. Gross

By the mid-1970s, the market had become sexier as shrewd investors like Mr. Gross

began trading bonds likes tocks — and began earning outsize profits.

In short order, Mr. Gross also dived into the first mortgage-backed securities (which

carried comfy government guarantees) and began studiously monitoring interest

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rates so he could place bets on his own macroeconomic predictions. This was highly

unusual for a bond fund manager — and still is.

“There are a lot of big bond shops that frankly don’t feel confident doing this,” says

Lawrence Jones, a Morningstar analyst. “It’s not part of their tool kit.”

Mr. Gross played well on television. In 1983, he became a regular on “Wall Street

Week” on PBS; he loved the attention, and his ubiquity gave Pimco a big boost. Four

years later, Pimco rolled out the Total Return fund. Over the next 10 years, its assets

soared to $24 billion from $165 million. Much of this was because of shrewd

investing. But TV did wonders, too. “It doesn’t do you any good to be good if nobody

knows about you,” Mr. Gross says.

In 1999, he warned in his monthly investment column that the dot-com bubble

would soon burst. The next year, it did. Despite the market downdraft, Mr. Gross’s

fund ended 2000 up 12 percent, and that same year he and his partners sold Pimco

to Allianz for $3.3 billion. Mr. Gross received $233 million for his stake, and Allianz

also agreed to pay him $40 million in retention bonuses and seems to be giving him

free rein.

Not that Mr. Gross was going anywhere.

FREE from distraction in a gym across the street from his offices, Mr. Gross happily

rides a stationary bike, followed by a half-hour of yoga. Toward the end of his

routine, he stands on his head for a few minutes in a position called the Feathered

Peacock. He wobbles so much that you expect him to lose his balance and fall over,

but he says some of his best ideas have come to him while he was upside down.

One of those insights came in 2005, when — while standing on his head — he began

to worry about the real estate bubble.

He’d watched the prices of homes climb into the stratosphere in Southern California,

and he says he felt as if he were witnessing something out of “Alice in Wonderland.”

Was this happening all around the country?

Pimco dispatched 11 mortgage analysts to 20 cities to find out. They posed as

prospective homebuyers and drove around with unsuspecting real estate agents and

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mortgage brokers who told them how easily they could get a home loan. “It was a

little deceptive,” Mr. Gross says. “I didn’t feel good about that, but I didn’t know how

else to get the real information.”

Mr. Gross says he thought it was obvious what was driving this madness: subprime

mortgages. He was certain that the real estate market would collapse and take the

economy down with it, and he made those thoughts known in letters to his investors.

Pimco steered clear of risky housing debt, which meant that, for a time, some of his

competitors who stockpiled the briefly lucrative products outperformed him.

For a fiercely competitive man, it was an awkward time. “Bill takes it hard when the

numbers aren’t what he thinks they should be,” his wife, Sue, confided by e-mail. “In

2006, he recommended a Pimco bond fund to the owner of a local doughnut shop,

and when it didn’t do well for a while, he could hardly go in the shop for his favorite

coconut cake doughnut.”

Fortunately for Mr. Gross, but not for the economy, this couldn’t last forever. The

housing bubble finally burst in 2007, and the crisis followed. He was vindicated. Yet

this was only part of the reason for his success. He also predicted in one of his

monthly columns that the government would have to pump billions of dollars into

the economy to avert a total collapse. At the same time, he and his Pimco team came

up with an audacious plan: invest in bond sectors that Washington would be forced

to support — like government-backed mortgages guaranteed by Fannie

Mae and Freddie Mac.

Mr. Gross whimsically calls this strategy “shake hands with the government.” And he

used his access to the news media to get the government’s attention. In a CNBC

interview on Aug. 20, 2008, he argued that Americans were putting “their money in

the mattress” because the government hadn’t rescued imperiled financial institutions

like Fannie and Freddie.

On Sept. 7, Henry M. Paulson Jr., then the Treasury secretary, announced that the

government was taking over Fannie and Freddie. The value of the Total Return fund

rose by $1.7 billion in a single day.

Published: June 20, 2009

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(Page 5 of 6)

Michele Davis, Mr. Paulson’s former spokeswoman, says Mr. Gross’s TV appearances

had nothing to do with the decision: “There are $5.4 trillion of Fannie and Freddie

securities around the world. Investors here and across the globe were worried and

voicing the same concerns.”

Related

Times Topics: William H. Gross

But some of Pimco’s critics aren’t convinced. “The Treasury Department watches

CNBC all day,” says Steven Eisman, a portfolio manager and banking expert at

FrontPoint Partners, an investment firm. “I know that for a fact. He was putting

pressure on them.”

Mr. Gross says nothing could have been further from his mind. He says he goes on

TV with “a disbelief that people will believe or act on what I say,” adding that “people

should think independently.”

At the same time, Pimco tried to influence the direction of the bailout itself. In the

spring of 2008, Pimco’s chief executive, Mohamed A. el-Erian, a former policy expert

at the International, floated a plan in Washington for a public-private partnership

similar to the P.P.I.P. plan that Mr. Geithner later unveiled. It didn’t get much

traction.

But then Lehman Brothers collapsed on Sept. 15. Mr. Paulson asked Congress to pass

the Troubled Asset Relief Plan, better known as TARP, which would enable the

government to spend $700 billion to buy mortgage securities from teetering banks.

The Treasury turned to Pimco and others for help.

“When we first asked for the TARP legislation in September, we were looking at

purchasing assets,” says Ms. Davis, the former Treasury spokeswoman. “We

definitely talked to Pimco and a lot of other asset managers. You had to find out how

such a program might work and bounce ideas around to see how this thing would

work.”

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In the midst of the crisis, in October, Mr. Gross’s friend, Mr. Buffett, wrote to Mr.

Paulson suggesting a plan similar to the one Mr. Erian had been pushing. However,

Mr. Buffett says he came up with his idea independently.

“I called Bill Gross and Mohamed and said: ‘I’ve got this idea. If it goes forward, I

hope you guys would manage it and would do it on a pro bono basis,’ ” Mr. Buffett

recalled in an interview. “Within an hour, they said they were on board and they were

willing to do whatever was called for.”

Mr. Gross publicly announced that his firm would do the job free. “I got call after

call, e-mail after e-mail saying what Bill offered was right for the country and that he

was a great American,” says a Pimco spokesman, Mark J. Porterfield. At first, it

looked as if the Treasury might take Mr. Gross up on the offer. But his hopes were

temporarily dashed when the Treasury simply gave TARP funds to the banks instead

of purchasing bad assets.

And at the same time, people began to wonder about Mr. Gross’s motives. He made it

clear that he was not afraid to put Pimco’s interests ahead of the government’s in the

bailout. As part of its “shake hands with the government” strategy, Pimco had bet

that the Bush administration would come to the rescue of the nation’s banks and

other financial institutions. So it bought a variety of those bonds, including those

of GMAC, the financial division of General Motors.

In November, as the economy continued to weaken, GMAC asked the Fed for

permission to become a bank holding company so it could receive TARP financing.

The central bank granted GMAC’s wish, with one caveat: GMAC had to swap 75

percent of its debt for equity, allowing GMAC to potentially buy back a big chunk of

its bonds for just 60 cents on the dollar.

Mr. Gross balked at the arrangement because, as a GMAC bondholder, he would

have been forced to take a big financial haircut. “We said: ‘It doesn’t look too good to

us. We think we’ll just hold onto the existing bonds,’ ” he remembered. Much to the

amazement of many people on Wall Street, the Federal Reserve, which declined to

comment, still allowed GMAC to become a bank holding company and the

government later guaranteed all of its debt, meaning that Mr. Gross’s GMAC bonds

would be worth 100 cents on the dollar when they mature.

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Mr. Gross is unapologetic about the outcome. “The government has a vested interest,

and it’s not necessarily aligned with Pimco’s interest,” he says.

SIMON JOHNSON, a former chief economist for the International Monetary Fund

and now a professor at the Sloan School of Management at M.I.T., says he isn’t

surprised that Mr. Gross is such a virulent foe of nationalization. As Professor

Johnson points out, Pimco is a major bondholder in some of the biggest banks.

Nationalization would hurt his portfolio.

(Page 6 of 6)

“It would reduce the present value of his holding,” says Professor Johnson, himself a

proponent of nationalization. “Therefore, he is not going to look good as an

investment manager.”

Related

Times Topics: William H. Gross

What of Mr. Gross’s predictions that nationalization would deepen the recession?

Professor Johnson acknowledges that there are risks either way, but says he thinks

that people should be skeptical when powerful financiers make doomsday

predictions.

“I think we pay undue deference to people who are very rich and have been

successful in the financial sector in this country,” he says. “We think they are the

gurus who think they have unique expertise, and if Bill Gross tells us there will be a

panic, it must be true. Well, no, I don’t believe it. These guys all say this kind of

thing.”

The twist, of course, is that the Obama administration has embraced the same

public-private partnership proposal that Pimco has been pushing along and that Mr.

Paulson briefly considered last fall. Mr. Gross says that the Geithner plan is better

because the government provides such generous debt financing.

Pimco is proud of its partnership with the government. Mr. Erian points out that the

firm’s executives have been members of the Treasury Department’s Borrowing

Advisory Committee (along with many other Wall Street executives) for years. Its

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current representative, the Pimco managing director Paul McCulley, says part of his

job is to ingratiate himself with officials at the Treasury and the Federal Reserve so

Pimco can better understand impending policy decisions. He boasts that he is on a

“first-name basis” with both Mr. Geithner and the Fed chairman, Ben S. Bernanke.

“We have a whole lot bigger profile now than we did years ago, but the fact of the

matter is we’ve been doing the same thing in the last year that we’ve been doing for

the last 10 years,” Mr. McCulley says. “I’d like to think we’re having some influence

in the public policy arena. And I say that first and foremost as a citizen.”

Citizen — but also investor. And some critics of the financial benefits that Pimco

might snare if the P.P.I.P. gets rolling are quick to point out what Pimco stands to

gain.

“The critics would argue that all the benefits go to Pimco,” says Representative Scott

Garrett, Republican of New Jersey, who is a member of the House Financial Services

Committee and a skeptic of the Geithner plan. “Well, maybe not all the benefits. But

they get the best ones right out the door. And the taxpayers are on the hook.”

The Obama administration says it will soon select lead fund managers for P.P.I.P. It’s

almost certain that Pimco will be among them. “If you are trying to encourage

investment from the private sector, isn’t it only logical to involve the most successful

asset management organizations in the private sector?” says Thomas C. Priore, chief

of ICP Capital, a boutique fixed-income investment bank.

And being selected by the government has other benefits, Mr. Priore adds. “If any

endowment or public pension plan representative is looking for an asset

management firm, he or she won’t get fired for hiring Pimco because, well, the

government hired Pimco,” he says. “That certainly enhances your franchise value.”

P.P.I.P.’s fate remains uncertain. When the Treasury Department put 19 of the

nation’s largest banks through a stress test, many passed the exam and their stocks

prices rose. They have raised $50 billion in new capital. Now some of them are likely

to hold on to their distressed mortgage securities in the hope that the housing market

recovers — rather than face the pain of selling the assets at a loss now (a situation

that may get dicey if housing doesn’t, in fact, recover).

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The Treasury now says that Mr. Geithner expects P.P.I.P. to serve as “backstop” for

banks that find themselves in a pinch.

There’s a darker scenario, possibly. If mortgage default rates do soar, some big banks

may fail. Then the administration would have to seriously consider nationalization,

which might devastate Mr. Gross’s holdings. He is, of course, well of aware of this

possibility and says he’s watching Mr. Geithner as closely as he watched the

blackjack dealers in Las Vegas.

“We just don’t want to flush it all down the drain,” he says. “You want to shake hands

with the government. But maybe it shouldn’t be a super-firm handshake.”

AT a lunchtime meeting this past spring at Pimco, executives tell Mr. Gross that

they’re worried about the fallout the firm will face if it receives a financial windfall as

part of P.P.I.P.

“The risk is that you have a Congress with a populist bug,” Mr. McCulley says.

Dan Ivascyn, another of the firm’s managing directors, agrees. “I think there is a risk

that we’re going to get criticized,” he says. “I think Pimco could get roughed up.”

“I think there is a much bigger chance of us getting roughed up personally,” says

Scott Simon, head of Pimco’s mortgage-backed securities team.

Finally, Mr. Gross weighs in.

“So what are you saying?” he asks. “If we fail, we’ll get the shaft, and if we succeed,

we’ll get the shaft?”

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Banking on opportunity By Steven Syre Globe Columnist / May 8, 2009 Boston Globe T

Apparently, retirement didn't agree with Bob Mahoney, the longtime Boston banker and former Citizens Financial Group vice chairman.

Mahoney is back in the banking business, sort of, and even working in the same State Street tower where he kept his Citizens office for so many years. But these days he isn't interested in working for banks. He's trying to buy them.

Yes, you read that correctly. At a time when investors are focused on bank stress tests and worried about growing levels of bad loans, Mahoney has commitments from big-money investors for about $800 million, said four people familiar with the venture. That might be enough capital to help him acquire banks with assets approaching $10 billion.

The idea of buying existing banks or starting new institutions in this environment isn't as crazy as it might sound. I've talked recently to several investors, unrelated to the Mahoney venture, who have considered starting banks on a much smaller scale.

The basic premise: There is a lot of banking business available, and healthy institutions with enough capital can clean up. Many businesses looking for financing are running into a very real credit crunch, and three big banks in the Greater Boston market - Bank of America, Citizens, and Sovereign Bancorp - are struggling with their own problems. Many investors see a market opportunity, despite the obvious risk of lending money in a severe recession.

Another angle: Some investors who believe the economy is stabilizing see bank stocks as a potential opportunity soon, as risk slowly starts to recede and share prices remain relatively depressed. Access to very inexpensive money, thanks to ultralow short-term interest rates engineered by the Federal Reserve, will turbo charge the profitability of healthier banks at some point. The leading index of big US bank stocks has doubled since it hit rock bottom in March.

Mahoney spent most of his career at Citizens and earlier at Bank of Boston as a commercial banker, lending to business clients. Christopher Downs, formerly a group executive vice president for consumer lending services at Citizens, has joined Mahoney in the new venture.

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So who are the investors backing the Mahoney venture? Thomas H. Lee Partners, the Boston private equity firm, is involved, along with other local investors. Some New York investors, including billionaire George Soros, are also believed to be helping to finance the venture.

Executives at Thomas H. Lee declined to comment, and a call to Soros's office was not returned.

Mahoney, 60, last appeared in this space nearly a year ago as he was about to retire at Citizens, one of the last to leave among the senior executives who helped former chief executive Larry Fish build the company into a New England banking giant. He returned a call yesterday but declined to answer any of my questions about his new business.

In his years at Citizens, Mahoney was deeply involved in the company's banking roll-up strategy. Citizens bought a long line of smaller banking companies in New England and beyond, integrating them into a growing banking organization. His new plans sound like a small version of the same strategy.

Mahoney is not the first former Citizens executive to try to buy banking businesses on his own. Steve Steinour, who eventually became the president of Citizens, left the company in 2008 and joined CrossHarbor Capital Partners in Boston last year.

Steinour, who had extensive experience managing troubled bank assets years earlier, sought to buy from sellers in distress. Instead, he ended up running one of the nation's hardest-hit regional banks in the current recession, taking over as chief executive of Huntington Bancshares Inc. in Columbus, Ohio, in February. At a recent brokerage conference for bank stock investors, Steinour expressed interest in buying other banks.

I doubt Mahoney has any such interest in distressed banks and their troubled balance sheets. The opportunity to build a large community-based bank by acquiring healthy smaller institutions, especially while so many big rivals remain hobbled, is an interesting idea that could attract lots of business.

The trick, as always, is to find other bankers who are willing to sell at an affordable price. Citizens often succeeded in buying banks by paying top dollar. That's a luxury Bob Mahoney, or any other buyer, may find hard to afford today.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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Planning and Executing a Successful Troubled Bank Acquisition

By Greyson E. Tuck, Gerrish McCreary Smith Western Independent Bankers

The current banking environment is tough for community banks. An increase in regulatory scrutiny and an economy in recession have combined to increase bank failures and problem banks across the board. Unfortunately, it appears the government has taken a “too big to fail” and “too small to matter” approach to the situation. This approach has led to a number of community banks whose best (or, in some instances, only) option is to market themselves for sale as a “troubled institution”.

The proliferation of community banks marketing themselves as troubled institutions has resulted in acquisition opportunities for healthy institutions that were previously unavailable. These troubled institutions have also created a whole new set of decisions to be made by a healthy institution’s board of directors as they enter the merger and acquisition arena.

A troubled bank acquisition can prove to be a profitable strategic move if the acquiring institution properly plans for and executes the acquisition. For those that do not, the results can be disastrous. The following are five principles a board should follow in planning for and executing a successful troubled bank acquisition.

Decide Whether the Bank Will Pursue a Troubled Bank Acquisition before the Opportunity Presents Itself The first decision to be made regarding the acquisition of a troubled institution is whether the acquisition fits within the bank’s long-term strategic plan. Some banks’ strategic plans are conducive to acquisitions while, for others, an acquisition of a troubled bank does not make sense no matter what the situation or how “cheap” it may seem initially. A board of directors should decide whether a troubled bank acquisition fits within the bank’s long term strategic plan long before an opportunity to make a troubled bank acquisition presents itself. Making this decision early allows the board to fully understand, debate and plan for the issues associated with a troubled bank acquisition. More importantly, it allows a board the benefit of being free from the pressure of time constraints under which troubled institutions normally operate.

In addition to determining whether a troubled bank acquisition fits within the bank’s long-term strategic plan, a board should consider whether its “appetite for risk” is conducive to a successful troubled bank acquisition. Some boards, no matter what the terms of the deal or condition of the target, simply do not have the appetite for risk necessary to complete a troubled bank acquisition. The board should determine whether it has the ability to withstand the ups and downs and the uncertainty of a troubled bank acquisition.

Identify the Ideal Target Institution If a board of directors has decided acquiring a troubled financial institution fits within the bank’s long-term strategic plan, the board should next identify the bank’s “ideal” target. Identifying an ideal target does not mean pinpointing a specific institution and waiting for it to become a troubled acquisition candidate. Instead, identifying the ideal target institution requires a board to identify the general attributes of the ideal troubled institution.

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A board should compile a list of the troubled bank’s characteristics that will give the highest probability of a successful and profitable troubled bank acquisition. The geographic location and size of an ideal target, the severity of the target’s problems and other important characteristics should all be considered.

It is unlikely a troubled bank acquisition opportunity will meet exactly each one of the ideal characteristics. However, identifying the ideal characteristics before an opportunity presents itself will allow a board to quickly gauge whether an opportunity is worthy of further consideration.

Use Outside Assistance to Determine the Structure of the Acquisition Recent troubled bank transactions have come in all shapes and sizes. Some recent troubled bank acquisitions have been structured as whole bank purchases. Others have been structured as a purchase of assets and assumption of liabilities. Some modern troubled bank acquisitions are not acquisitions at all, but are more properly characterized as equity injections. With an array of options available to troubled bank purchasers, it is important for the acquirer and their consultants or attorneys to identify exactly what acquisition structure will yield the greatest likelihood of a successful troubled bank acquisition.

Be Vigilant In the Performance of Due Diligence Troubled institutions are troubled for a reason. The majority of today’s troubled institutions have earned their status as such because of poor or declining asset quality. However, this is not the sole reason for the increase in the number of troubled banks. A number of institutions have become troubled institutions because of securities losses, fraud or embezzlement, or some other reason. There are two critically important aspects of due diligence when acquiring a troubled institution. First, the acquiring institution must determine exactly what is being purchased and what led the troubled institution to its current condition. Second, the acquiring institution must determine how the acquisition of the troubled institution will return a profit.

In addition to determining what is being purchased and how it will yield a profit, a healthy institution should devote time in due diligence to pricing issues. A troubled institution, no matter how troubled it may be, could be a great deal if it is priced correctly. On the other hand, a slightly troubled institution can turn out to be a bad deal if the price is not right. A buyer should spend time during due diligence to determine a purchase price that adequately reflects risk and expected returns.

Don’t Over Allocate Resources to the Troubled Institution Troubled bank acquirers devote a substantial portion of their time and resources to “fixing” their recent acquisition. While this is expected in a troubled bank acquisition, over allocating financial or managerial resources to the recently purchased institution can lead to a new set of problems. An acquirer with too much focus on a recent acquisition can neglect their original, healthy institution and jeopardize its safety and soundness.

Troubled bank acquirers should be vigilant in their oversight of both the original and the acquired institution. Particular attention should be paid to striking the right balance of resources allocated to both. A healthy institution can quickly turn into a troubled institution if too much time and resources are spent fixing the troubled

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institution and not enough time and resources are spent maintaining the healthy institution.

The near future will present a number of opportunities for healthy institutions to acquire troubled banks. These acquisitions can prove to be a profitable strategic move so long as the acquiring institution sticks to the fundamental principles of buying troubled banks.

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Washington How Many to Fail; Do We Hear 1,000? By Joe Adler 895 words 23 March 2009 American Banker 1 Vol.174, No.55 English (c) 2009 American Banker and SourceMedia, Inc. All rights reserved.

WASHINGTON - Predicting how many banks will fail in the next few years is quickly becoming a booming business as the economy worsens.

With no official number from the Federal Deposit Insurance Corp., analysts, investors and others are offering their own predictions - and none of them are very encouraging.

Weiss Research Inc. of Florida said last week that more than 1,500 institutions were at imminent risk of failure -roughly six times the size of the FDIC's "problem" bank list in the fourth quarter.

Wilbur Ross, the famous investor, said there could be as many as 1,000 insolvencies as a result of the housing crisis. Other analysts offer guesses all over the map.

About the only thing they agree on is this: the number of failures - which was at 17so far this year by American Banker's Friday deadline and likely to be higher by today -will be extraordinarily high.

"Housing prices are still going down and most likely will continue to go down all year," said Brad Hunter, the chief economist and national director of consulting for Metro study, a market research firm based in Houston. "There will be more pressure for write downs."

Hunter predicts 400 to 500 failures resulting from the downturn, but he said there are still many factors that can affect the final tally. "It depends on what is done with mark-to-market [accounting], and how many voluntary mergers and shotgun weddings there are," he said.

David Zelman, the president of Zelman & Associates, an Ohio firm that provides real-estate valuation data for banks, Realtors, regulators and other stakeholders, predicts a figure between 800 and 1,000.

"The net of it is the majority of the exposure of the asset class" most hurt by the crisis "is in small- to medium-sized community and small regional banks," Zelman said.

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The one institution not playing this guessing game is the one with the most knowledge: the FDIC. Instead, the agency has offered only a projection of the total cost to the Deposit Insurance Fund, saying collapses will cost $65 billion in the next five years.

Observers said the FDIC's reticence makes sense.

If the agency went public with a failure projection, it "would scare people and start to have the potential for bank runs," Zelman said. "I don't think it's in their interest to do that."

Hunter agreed.

"I don't think the FDIC necessarily should, because they're a policy organization," he said. "What they do, the way they comport themselves, and the level of pressure they exert at any given institution could determine the pace" of failures.

While the private estimates are high, they are not completely out of line with the pace of failures during the savings and loan crisis. From 1987 to 1990, 1,648 institutions were closed, with the largest tally, 534, coming in 1989.

But the estimates - and how they are calculated - of how the recent downturn will affect failures are still varied.

Ross, the chief executive of W.L. Ross & Co., said he includes recipients of the Troubled Asset Relief Program in his projections because "conceptually, if a guy needed all that Tarp money, that means he couldn't make it on his own."

"Counting them in, which is a couple hundred, I would think it comes to something approaching 1,000," he said.

Still, Ross said he could not give a more definite number of institutions the FDIC will have to take over, "because I don't know how far Tarp will go."

Ron Glancz, a partner at Venable LLP and a former FDIC assistant general counsel, said it used to be easier to predict the failure toll.

Now, the impact of the federal government's bailout may narrow the final count, and the economic cycle is always in motion.

"I just don't think that, given where we are today, that you can actually predict in any kind of certainty what the number is going to be," he said.

"It was easier years ago. There are a number of programs that the FDIC, Treasury and the Federal Reserve Board have put in place that I think may in fact prevent bank failures. We're not sure when the economy is going to turn around. Some people say it will in 2010. But what if it turns around at the end of the year? That will prevent bank failures."

Glancz said the FDIC must manage "a balance between transparency and the need to be accurate and not to alarm the public."

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"The bottom line is I don't think it's as easy to predict bank failures as it was years ago," he said. "Secondly, there is a question of whether by saying it, you make it so. ... That's the concern I would have in terms of numbers."

Robert Hartheimer, a former FDIC director of resolutions, said the variance of these predictions is understandable.

"Everyone has a different view of where the economy is going and the value of banking assets and in particular commercial real estate values," said Hartheimer, now a special adviser to Promontory Financial Group LLC.

"I'm not sure anyone is incorrect, but since it's an estimate, it really depends on the assumptions that are being used from one source to another."

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BLOOMBERG Carlyle Group Said to Raise $1 Billion to Buy Stakes in Banks By Jonathan Keehner and Jason Kelly

Feb. 13 (Bloomberg) -- Carlyle Group LP, the world’s second- largest buyout firm, has lined up about $1 billion to invest in banks as the Obama administration seeks to attract private capital to troubled financial institutions, according to two people familiar with the matter.

Carlyle, based in Washington, plans to raise as much as $3 billion for the new fund this year after initially gathering $600 million in October, said the people, who asked not to be named because the fund is private.

Firms including Carlyle and J.C. Flowers & Co. are increasing investments in financial assets as loans for leveraged buyouts of companies remain scarce. Treasury Secretary Timothy Geithner is trying to coax private investors into the effort to bail out the U.S. financial system. Regulators have eased some rules to promote private takeovers of banks.

“Private equity will figure prominently in bank consolidation this year,” said Chip MacDonald, a partner with Jones Day in Atlanta who specializes in deals among lenders. “Buyout firms have greater knowledge of the rules and regulators are taking a more pragmatic approach to applying them.”

A Carlyle spokesman declined to comment.

Announced private-equity transactions dropped more than 60 percent to $211 billion last year as a lack of Wall Street financing crippled deal making. Buyout firms are casting about for ways to invest an estimated $450 billion in capital committed by their clients.

Flagstar, Boston Private

Matlin Patterson Global Advisers LLC put $250 million last month into Flagstar Bancorp, a saving bank based in Troy, Michigan, through a so-called ‘silo’ structure that isolates the investment from the New York private-equity firm’s other funds and holdings, according to a regulatory filing. Flowers, also based in New York, in January joined a group of investors to buy bankrupt IndyMac Bank from the Federal Deposit Insurance Corp. and inject $1.3 billion in cash.

Carlyle in July said it invested $75 million in Boston Private Financial Holdings Inc., a publicly traded asset manager. Carlyle, which has more than $89 billion under management, hired Olivier Sarkozy from UBS AG last year to help run its financial- services group, which includes former Treasury undersecretary Randal Quarles.

The FDIC said in November that it would allow groups without bank charters, including private-equity firms, to bid for the deposits and assets of failing lenders. After consulting

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with buyout firms, the Federal Reserve issued revised guidance in September easing limits on minority investments in banks.

Wilbur Ross

U.S. regulators this year have seized nine banks amid a credit crunch that fueled more than $1 trillion in financial- company losses and write downs since 2007.

Billionaire Wilbur Ross, who focuses on distressed assets, has predicted a “massive consolidation” among banks and pushed for regulatory agencies to loosen rules around bank ownership by private-equity firms. In a Feb. 11 interview at his New York office, Ross noted that individuals, investment banks and corporations all have the ability to buy controlling interests in banks without submitting to the same rules as buyout firms.

“It makes no sense to me that the bulk of participants in the economy can own a bank, but private-equity funds cannot,” he said, adding that his firm and others have bought and turned around banks overseas. “It’s pretty bizarre that a private- equity fund is permitted by a foreign government to buy a bank, but it’s not permitted by our government.”

Ross last month agreed as an individual to buy 68.1 percent of Florida’s First Bank and Trust Co. and said he plans to use First Bank and Trust as a platform to buy other banking assets.

To contact the reporters on this story: Jonathan Keehner in New York jkeehner@bloomberg.net; Jason

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayItgops3jiU&refer=home#

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CNNMoney Failed banks for sale...who's buying?

A move by regulators to open up the failed bank bidding process has sparked a wave of investor interest. But experts are wary about its real impact. By David Ellis, CNNMoney.com staff writer December 19, 2008: 6:00 AM ET Lloyd's lessons from the 1990s

NEW YORK (CNNMoney.com) -- More banks will certainly fail in the months ahead, but at least regulators shouldn't have any trouble finding buyers.

Last month, two of the nation's top banking regulators - the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency - widened the buyer pool for failed banks by opening up the bidding process to both investor groups and individuals.

Traditionally, this process has been limited to chartered banks and savings institutions. But regulators changed their stance partly in response to strong demand from non-bank investors and expectations that the supply of failed banks will grow in 2009.

So far this year, only 26 of the more than 8,400 FDIC-insured institutions have failed. But with 171 institutions on the FDIC's so-called 'problem bank' list as of the end of the third quarter, it's likely that the assets of many more failed banks will be up for grabs next year.

Waiting for a failure Despite some high-profile bank mergers in the past few months, there has yet to be a major wave of consolidation in the industry since many banks have been afraid of inheriting another company's troubled loan portfolio.

Instead, many banks have waited for others to fail outright before stepping in. That's because once the FDIC assumes control of the failed bank's troubled assets, an acquirer can get deposits on the cheap and a clean balance sheet.

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Officials at the OCC and FDIC were unable to provide any figures as to how many investors have applied to buy failed banks so far. But they said interest in the program has been robust since it first launched.

One firm that has already won conditional approval to bid for a failed bank is Ford Group Holdings, an investment group which includes long-time Texas bank investor Gerald J. Ford.

That interest could extend to wealthy individuals who want to break into the banking game and even private equity players.Christopher Flowers, who runs the buyout shop J.C. Flowers, scooped up a tiny bank in northern Missouri with $14 million in assets in August. At the time, he hinted at plans to expand.

But private equity investments in the U.S. banking industry have fared poorly this year. The $7 billion stake in embattled savings and loan Washington Mutual taken by private equity giant TPG was wiped out after the savings and loan giant collapsed in late September. So buyout shops may be reluctant to place any more bets.

"I think you have investors sitting on the sidelines saying 'Let's just wait and see how the entire business model shakes out,'" said Jess Varughese, managing partner at Milestone, a New York City-based management consulting firm that focuses on the financial services industry.

Jennifer Thompson, an analyst at the New York-based financial services research firm Portales Partners, added that the move to open up the bidding process for failed banks is largely symbolic anyway since banks themselves already have a hearty appetite for the deposits of failed rivals.” It is just adding to the perception of liquidity in the market," she said.

Cautionary tale Nonetheless, regulators have said they hope that by relaxing standards about who can participate in the program, they can fetch a better price for the assets of failed banks and better returns for the FDIC's deposit insurance fund. The agency estimates that the fund, which is used to guarantee deposits when a bank fails, will suffer about $40 billion in losses through 2013.

Last summer's collapse of the California-based IndyMac wiped out $8.9 billion from the fund. Regulators have yet to announce a buyer for the troubled mortgage lender. But the program is not without its risks. Faced with an overwhelming number of bank failures, banking regulators enacted a similar move during the savings and loan crisis of the 1990s. That backfired, however, after a number of failed institutions were sold to developers which used the bank to fund their own businesses.

"The regulatory agencies may be looking at some individuals that are very astute," said one former staffer for the Resolution Trust Corporation, which the federal government created to help handle failed institutions during the savings and loan crisis. "That may look good now, but nobody really knows."

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Insiders Reap Huge Profits On Purchase Of Failed South Carolina Bank

By Bill Zielinski on April 10th, 2010

Myrtle Beach Bank Failure Results In Fast Profits For Insiders

South Carolina saw its first banking failure since 1999 as regulators closed the failed Beach First National Bank of Myrtle Beach. The failed bank had total assets of $585.1 million and total deposits of $516.0 million. The cost to the FDIC Deposit Insurance Fund (DIF) for this latest banking failures is estimated at $130 million. The cost to the FDIC DIF for the 42 banking failures to date in 2010 now totals $6.6 billion.

The assets and deposits of failed Beach First were taken over by the Bank of North Carolina under a purchase and assumption agreement with the FDIC. As has been the case with almost all recent banking failures, the FDIC entered into a loss-share agreement with Bank of North Carolina to limit the amount of losses on the purchase of the failed banks’ assets. The loss share agreement covers $498 million (85%) of the assets purchased by the Bank of North Carolina.

The FDIC has been sensitive to criticism about the profits being made on the purchase of failed banks and has recently lowered the amount of loss protection on purchased failed bank assets from 90% to 85%. (See One West Makes Billions on Failed Bank Purchase). The FDIC needs buyers for the multitude of failed banks and without the realistic expectation of profit from the purchase of a failed bank, the FDIC will have a very difficult time finding buyers. This week’s bank closing is certain to raise the level of debate over the FDIC’s competence in resolving banking failures on the best terms for the taxpayers.

Despite the FDIC’s slightly reduced loss share protection, the Bank of North Carolina apparently sees opportunity in the purchase of failed Beach First. Swope Montgomery, CEO of BNC Bancorp, the parent company of Bank of North Carolina, stated that “This transaction positions our company for the next stage of its development. We see additional opportunities to serve customers in attractive markets in the Carolinas and beyond, and plan to carefully deploy investor capital in the future to maximize long-term shareholder value while taking care of our customers in our communities.”

Investors also apparently view the purchase of failed Beach First as a huge profit opportunity for BNC Bancorp. The stock of BNC Bancorp skyrocketed 12.5% in after hours trading, up $1.03 to $9.28. Bank management and insiders who hold almost 20% of BNC’s float of 7.34 million shares, have instantly reaped a $1.5 million windfall, courtesy of the US taxpayer who ultimately pays for the cost of failed banks (in this case

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alone $130 million). Keep in mind that BNC Bancorp “purchased” failed Beach First with no money down and an FDIC guarantee to pick up most of the losses on the failed bank’s assets.

The FDIC’s public relations team may have to work a little harder to convince the public that the purchasers of failed banks are not being enriched at the expense of the John Q Public. Logical minds may wonder why investors are reaping billions in profits on the purchase of failed banks while taxpayers are bearing the cost of hundreds of billions in bailout losses.

COURTESY STOCKCHARTS.COM

Bailed Out Bank Buys Failed Bank

Adding to the irony of this latest failed bank fiasco, BNC Bancorp received $31.3 million in bailout funds from the US Treasury in December 2008, none of which has been repaid. The funds were received under the US Treasury’s Capital Purchase Program, described as follows by financialstability.gov:

Treasury created the Capital Purchase Program (CPP) in October 2008 to stabilize the financial system by providing capital to viable financial institutions of all sizes throughout the nation.

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Through the CPP, Treasury will invest up to $250 billion in U.S. banks that are healthy, but desire an extra layer of capital for stability or lending.

Under this voluntary program, Treasury will provide capital to viable financial institutions through the purchase of up to $250 billion of senior preferred shares on standardized terms, which will include warrants for future Treasury purchases of common stock. Financial institutions participating in the CPP will pay the Treasury a five percent dividend on senior preferred shares for the first five years following the Treasury’s investment and a rate of nine percent per year, thereafter.

The funds invested in BNC by the US Treasury are, in this case, not likely to result in a loss to the taxpayers and the US Treasury is receiving 5% in dividend payments. As of February 2010, the US Treasury received $1.87 million in dividends on the preferred stock issued by BNC to the Treasury under the CPP. In addition, if the stock price of BNC continues to increase, the US Treasury will most likely recognize a gain on stock warrants that were issued by BNC in conjunction with the preferred stock issue.

Aside from the fact that the US Treasury is probably going to fully recover its investment in BNC, was the Capital Purchase Program (CPP) overly generous to a banking industry that made exceptionally poor lending decisions? Some insight into this question can be gained by looking at how BNC used the capital provided by the Treasury to score large gains for BNC insiders and shareholders. Although some of the CPP funds were used by BNC to satisfy the credit needs of its customers, a large amount of the capital from the US Treasury was used to speculate on a leveraged investment in mortgaged backed securities - this from BNC’s lastest 10k.

During 2008, the Company received $31.3 million from the UST for participation in the CPP. The CPP gave us the opportunity to raise capital quickly, at low cost, with little shareholder dilution, and continue to support the credit needs of our communities.

In conjunction with the funds received from the CPP, management began implementing a strategy to deploy these funds into government agency sponsored entity mortgage-backed securities, well before rates in this sector began to decline due to aggressive purchases by the Federal Reserve, UST, and other community banks seeking to leverage their new CPP funds. That strategy resulted in the Company purchasing $265 million of FNMA and FHLMC sponsored mortgage-backed securities in November and December of 2008, and an additional $76 million of bank-qualified municipal government securities during the fourth quarter of 2008 and the first quarter of 2009. The tax equivalent yield on these investments was 5.70%. These security purchases were funded by short-term deposits at rates below 1.0% ….. This leverage transaction has provided sufficient net interest income to offset the cost of the CPP dividend payments, and provide additional operational income to the Company. During 2009, to meet our loan and asset growth demands, we sold approximately $90 million of investment securities that were purchased as part of the above leverage strategy, described above; recognizing gains in excess of $3.7 million.

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The massive government bailout of the banking industry in 2008 was necessary to prevent a financial system meltdown, despite strong opposition by a skeptical public. In 2010, there is likely to be a justifiable surge of outrage as the public learns how special interest groups are reaping billions in profits on FDIC sponsored failed bank purchases.

Purchasers of Failed Banks Reap $$Billions In Profits

OneWest Bank, FSB, is the fastest growing bank in the country since being newly formed in early 2009 by a group of private Wall Street investors for the express purpose of acquiring failed banks from the FDIC. OneWest’s first acquisition was done on March 19, 2009, when it acquired the $32 billion asset Indy Mac Bank which had failed in July 2008. In December 2009, OneWest acquired another large failed bank, First Federal Bank of Los Angeles, which had $6.1 billion in assets at the time of closing. With this week’s acquisition of La Jolla Bank, One West is now a banking empire with over $40 billion in assets acquired from the FDIC.

The FDIC has been heavily criticized lately by those who question whether OneWest got too good of a deal on its purchase of failed banks. Indy Mac was the most costly banking failure in U.S. history at $10.7 billion and the FDIC could still face billions more in losses under its loss-share transactions with OneWest. The question of whether OneWest received a windfall at taxpayer expense became even more relevant this week when OneWest reported huge profits of $1.6 billion last year.

The private investors who formed OneWest had initially contributed only $1.55 billion. Bert Ely, a well respected banking consultant remarked that “This is one hell of a deal for those owners, but hardly a good deal for the banking industry, which pays the FDIC’s bills. These are just incredibly sweet numbers..The public policy question is, why are they so good? Particularly given the magnitude of the loss estimated at the FDIC.”

The FDIC has been extremely sensitive to criticism on this matter and put out a press release defending its actions, noting that the FDIC has yet to pay a penny to OneWest on its loss-share agreements. The FDIC has been swamped with banking failures over the past two years and at times has had difficulty attracting purchasers for failed banks despite providing loss guarantees.

In the case of OneWest, however, the FDIC seems to have given away the store. Wealthy private investors are reaping billions in profits while the banking industry is being hit with huge FDIC assessments to cover banking failures and depositors are being paid virtually zero on their bank savings. With possibly hundreds of more banking failures to come this year, the OneWest bonanza is not the type of publicity that the FDIC needs.

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Bank big shots eying Ga. apply to start bank in Fla.

A group of national banking all-stars said to have their eyes set on failed bank deals in Georgia and throughout the Southeast have applied with Florida regulators to start a bank in the Sunshine State.

Bank of the Southeast, said to include backers including a former Federal Deposit Insurance Corp. chairman, and the former head of the Federal Home Loan Bank of Atlanta (FHLB Atlanta), have applied for a charter with the Florida Office of Financial Regulation’s Division of Financial Institutions.

The group, said to include former FDIC Chairman William Issac, also boasts ex-FHLB Atlanta Chairman Ray Christman and Office of Thrift Supervision’s former Southeast regional director, John E. Ryan, among its principals.

The charter application—along with a separate bid including former Bank of America Corp. heavyweights—was first reported Thursday by Jacksonville Business Journal, a sister publication of Atlanta Business Chronicle.

The Chronicle first reported about Bank of the Southeast and its interest in failed banks Feb. 26.

The group is seeking to initially raise about $500 million from institutional and individual investors, sources have previously told the Chronicle. The group could likely raise upwards of $1 billion.

The group said in the filing it is based in Ponte Vedra Beach, Fla. In the filing, Ryan is listed as chairman of the banking company, and his registered address is in Colony Square in Midtown Atlanta. Bank of the Southeast would be a subsidiary of BSE Management LLC. The group has also filed for a business license in Georgia, according to the Georgia Secretary of State’s Office’s Web site.

David M. Moffett, former CEO and director of Freddie Mac, will be president and CEO of both the bank and its holding company, Bancorp of the Southeast LLC.

Other key players involved are: Roger Helms, former First Union CEO of the Florida market; Cecil Sewell, former chairman of RBC Centura Banks and former chairman and CEO of Centura Banks of North Carolina; former SunTrust Banks Inc. executive vice president William Serravezza; and former SunTrust Vice Chairman John Clay.

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The proposed board of directors also includes some veteran Florida bankers such as Robert Helms, retired president and CEO of Wachovia Bank of Florida, and the former chairman, president and CEO of SunTrust Bank in Florida, George W. Koehn.

Private equity has been seen as a potential savior of banks, bringing needed capital to stabilize one of the foundational industries of the nation’s economy.

Georgia leads the nation with 37 bank failures since August 2008, and private equity-backed players have gobbled up 12 of those lenders (including the six bank subsidiaries of Security Bank Corp. of Macon).

Isaac, the former FDIC head, has been linked to the group, but was not included in the executives proposed in the filing, which was dated in February.

Sources within the Atlanta banking community have said the team previously had inquired about acquiring a healthy Peach State lender and using it as a platform to go after ailing institutions in northern Florida and Georgia.

The wave of private equity-backed buys that had been expected for more than a year might be on the verge of cresting.

Capital willing to invest in failing banks is mushrooming on the sidelines, industry sources say. Bank of the Southeast would join a growing field of private equity-backed bank management teams scouring the region.

At least a half-dozen private equity investor groups have been rumored to be eyeing Georgia, in addition to the two that have successfully completed deals here in the past year.

Milton Jones, the former market president for Georgia for Bank of America Corp., is known to be heading a $1 billion group of former Wachovia Corp. and BofA big shots seeking a “shelf charter” from federal regulators that would enable them to buy failed banks.

Also Thursday, Jacksonville Business Journal reported North American Financial Holdings Inc., a group led by former BofA Vice Chairman Eugene Taylor, has applied with the Office of the Comptroller of the Currency for a charter. The group is armed with more than a half billion in investor capital.

Nearly 200 banks nationwide have failed since the current banking crisis began in 2008, and more than 700 banks are on the FDIC’s so-called “problem list.”

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A rush to buy failed Florida banks Private equity firms, which pool money from wealthy investors, and other nontraditional buyers see big opportunities in bidding on failed banks in FDIC auctions.

Last year, 140 banks were seized by regulators. The FDIC expects even more banks to fail this year.

Strong banks, feeling more upbeat about their outlook these days, remain the main bidders at FDIC auctions.

The FDIC-backed deals are attractive. The agency typically agrees to shoulder 80 percent of any losses on the old bank's troubled loan portfolio. That protects the new owners from most of the risk of buying a failed bank.

Regulators are requiring special conditions for private equity firms to buy failed banks: They aren't allowed to sell the banks for at least three years. And they have to keep higher levels of capital to insulate against potential losses than traditional banks do.

John Kanas was at breakfast at the Four Seasons on Brickell Avenue recently when he bumped into Daniel Healy, his former right-hand man who had helped him build a big, profitable New York bank that sold for a princely sum.

These days, the two veteran New York bankers are still chasing bank deals. But they're facing off as competitors in what is shaping up to be a gold rush to buy up failed Florida banks under lucrative deals with the Federal Deposit Insurance Corp.

``It was kind of strange. There we were: I was with a client. He was talking with a potential client,'' says Kanas, 63, former chairman and CEO of North Fork Bancorp -- and the man who led a group of private equity firms in a pioneering bid to acquire the collapsed BankUnited from the FDIC in May 2009.

Kanas' deal for BankUnited, the largest Florida-based bank, marked only the second time regulators allowed private equity firms, which pool money from wealthy investors, to own a bank.

Since then, dead banks auctioned off by the FDIC have become all the rage among the smartest money on Wall Street. And Florida and Georgia are emerging as the El Dorado of opportunity to pick up failed banks.

A quarter of all the troubled U.S. banks are in these two states, according to Miami banking analyst Ken Thomas.

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Healy's firm, Bond Street Holdings, raised $440 million through Deutsche Bank to focus exclusively on acquiring flopped Florida banks. Bond Street's diverse group of investors joined a ``blind pool,'' with the understanding they wouldn't know exactly what shape the venture would take but that it would buy failed banks.

In January, Bond Street snapped up two small Florida banks in FDIC-assisted deals, and it plans to acquire more. ``We want to build the next Barnett Banks,'' says Healy, 66, who oversaw many bank acquisitions as former chief financial officer of North Fork. He is a director at Keefe Bruyette & Woods, a prominent New York investment bank specializing in financial-services companies.

His old boss Kanas is voicing the same ambition: to create another Barnett.

Barnett, which was the gem of Florida banking with operations across the state, was acquired by Bank of America's predecessor in 1997 during an earlier wave of mergers.

At the Four Seasons, Kanas teased Healy, who was a top lieutenant for 14 years, for getting back into banking.

``John made a joke: `You couldn't make a career out of banking the first time around so you're going to try again,''' Healy recalls. But Healy takes it in stride. ``John is like my brother,'' he says.

These days, it seems everybody and his brother wants a piece of the action as the FDIC auctions off failed banks. Typically, the FDIC deals have alluring loss-sharing agreements that shield the buyers from 80 percent of loan losses. The buyers, in turn, help the FDIC by working through troubled loans to minimize the hit to the insurance fund.

``Loss-sharing is a very useful tool to allow the FDIC to operate more efficiently and effectively,'' says FDIC spokesman David Barr. ``Less of our cash is wrapped up in illiquid assets.''

Barr says if the FDIC had to dispose of the bad loans, they'd likely get fire-sale prices.

Kanas pounced on the opportunity early in the dark days of the recession when few were willing to act. After months of shopping BankUnited to potential buyers, the FDIC drew only three bids. Kanas got the assets for a 24 percent discount to face value.

The new BankUnited already has posted fat profits: $163 million between May and the end of 2009, a 26-percent return on investment.

That's sweet even for private equity firms, which expect fat returns. The BankUnited deal has helped lure other nonbank investors to look at failed banks.

``There is a lot of private equity interested in banks,'' says Robert Tortoriello, an attorney at Cleary Gottlieb Steen & Hamilton in New York.

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Tortoriello helped Miami Dolphins owner Stephen Ross with his brainstorm to buy a failed bank.

Ross made his fortune in real estate. But now he has teamed up with Jeff T. Blau and Bruce A. Beal Jr., two top executives at The Related Companies, his New York real estate firm, to form SJB Bank. The SJB name comes from Steve, Jeff and Bruce's first initials.

Last fall, SJB got a shelf charter, which gives it authority to buy a failed bank when it finds the right one. In February, SJB raised more than $1 billion in capital through Deutsche Bank. But it hasn't yet bought anything.

Adolfo Henriques, a prominent figure in Miami banking circles, was slated to be the CEO of Ross' new bank, according to regulatory filings. However, Henriques said last weekthat he won't after all. Neither Henriques nor a spokeswoman for Ross would say why.

Others are taking a different approach than a new charter to get into the game. In February, First Southern Bancorp in Boca Raton raised $400 million in fresh capital, mostly from mutual funds and hedge funds, to ``supercapitalize'' the company. Its strategy: to buy failed banks in South Florida.

``There's been a lot of interest in the last eight or nine months in this type of business venture -- purchasing failed banks,'' says J. Herbert Boydstun, former CEO of Hibernia National Bank in New Orleans. He led the investment and is chairman and CEO of First Southern.

At Bond Street, things happened fast. In January, Bond Street, based in Naples, won the bidding for the failed Premier American Bank in Miami. A week later, the new Premier acquired the failed Florida Community Bank in Immokalee. ``In a few short weeks we were a banking company with $1.2 billion in assets and $875 in deposits,'' says Healy, who has a home in Jupiter.

But Healy has a long way to go to catch up with Kanas: BankUnited has $11.1 billion in assets and 77 offices in 13 counties.

Healy acknowledges that Kanas -- acting early -- got the sweetest deal from the FDIC. ``The BankUnited deal was the deepest discount,'' he says.

When BankUnited failed, the bank regulators were just cracking open the door to private equity outfits, and few firms were geared up to navigate the regulatory maze. Meanwhile, most banks were too focused on their own problems to think about bidding.

``If that deal [for BankUnited] was happening today, there would be more strategic buyers [traditional banks]. But it didn't happen today. It was during a much deeper time

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in the crisis,'' says Jimmy Dunne, senior managing principal of Sandler O'Neill + Partners, an investment bank specializing in financial institutions.

Indeed, the FDIC already is getting less generous. Until recently, the agency has agreed to shoulder 80 percent of loan losses on troubled portfolios with an added promise that after a certain threshold, the agency would cover 95 percent of losses. That leaves a buyer to swallow only 5 percent if things really go south.

But the FDIC recently decided it will no longer offer the 95 percent protection. So far, no deal has had enough losses to hit that threshold anyway.

Kanas, for his part, won't crow about his good fortune. ``Frankly, we're very pleased,'' he says solemnly. ``We've met and or exceeded all of our expectations