FDIC considers proposal to get piece of failed-bank buyers' stock gains

The FDIC reaped $23.3 million when it tested the proposal in the purchase of failed lender AmTrust.
The FDIC reaped $23.3 million when it tested the proposal in the purchase of failed lender AmTrust. (Tony Dejak/associated Press)
By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, January 2, 2010

The share prices of some companies that bought failed banks from the Federal Deposit Insurance Corp. in recent months have climbed rapidly, suggesting that investors think the buyers are getting good deals.

Now the FDIC may seek a piece of the celebration. The agency, which sells each failed bank to the highest bidder, is reviewing a staff proposal to encourage companies, as part of their bids, to offer a payment based on any short-term jump in their share price. The potential value of the payment would be considered in selecting a winner.

The FDIC, which collects premiums from all banks to repay depositors in failed banks, estimates it will spend $36 billion on the 140 banks that failed in 2009, and tens of billions more on failures in 2010. Squeezing more money from buyers of failed banks reduces the amount that other banks must pay.

The agency tested the idea in December when it selected New York Community Bancorp to take control of AmTrust Bank, a failed Cleveland lender. In exchange, New York Community promised to pay the FDIC the value of any post-deal jump in its share price multiplied by 25 million. The FDIC reaped $23.3 million.

James Wigand, deputy director in the FDIC division that handles bank failures, said the strategy would let the agency benefit from renewed interest in financial stocks. He said investors were now applauding the purchase of failed banks, whereas earlier in the crisis they tended to reserve judgment.

"As opposed to taking on somebody else's problems, now it's more likely to be seen as having a positive effect," Wigand said.

The 140 banks closed last year was the largest toll since the early 1990s. The failed banks mostly were small, collectively holding about $150 billion in assets -- in aggregate about the size of a large regional bank such as Capital One. Most of the failures happened in just four states: Georgia, Illinois, California and Florida. The causes varied widely, but the mortality rate was particularly high among thrifts that specialized in mortgage lending, and among banks that funded real estate development in the sprawling Sun Belt.

The FDIC projects that the number of failures could increase in 2010. The agency listed 552 banks as facing serious problems at the end of September, a 33 percent increase over the 416 banks it listed at the end of June. The agency does not disclose the names of the banks on the list.

The agency's board voted in December to increase the agency's budget by 55 percent to $4 billion for 2010, a sum funded by the banking industry, and that it would hire about 1,600 temporary workers, increasing its staff by 23 percent. The increases "ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions," FDIC Chairman Sheila C. Bair said in a statement.

When a bank fails, the FDIC seeks to sell its branches, deposits and loans at the highest possible price. Typically the highest bidder does not agree to purchase all the loans, particularly those in default, so the FDIC seeks to sell those loans to other investors. As bank failures pile up, the agency has experimented with a wide range of techniques to attract the highest possible bids, including online auctions, loss-sharing agreements and operating some banks for weeks or months before seeking buyers.

The benefits of the stock-price clauses are limited because they cannot be used in every case. Small failures often are sold to banks so small their shares are not traded publicly. Large failures often are sold to banks so large that the deal does not matter to investors. The largest failed bank of 2009, Colonial Bank of Alabama, was sold to BB&T of North Carolina in August. Four months later, BB&T's share price is virtually unchanged.

Still, for many mid-size banks, the clauses could be lucrative.

Shares of East West Bancorp have jumped 83 percent since it bought its largest rival, United Commercial Bank, from the FDIC in November. Shares of Iberiabank are up 21 percent since the Louisiana firm expanded into south Florida in November by buying Orion Bank from the FDIC. MB Financial got a 21 percent boost after buying another Chicago company, Corus Bank, from the FDIC in September.

The stock price agreements are a version of warrants, contracts that give investors the right to buy shares of a company's stock at a fixed price for a certain number of years. The FDIC's agreements, however, do not involve the ownership of stock and are focused on short-term appreciation.

The agency also has used longer-term agreements, particularly in the late 1980s and early 1990s. When it sold Florida-based BankUnited to a group of private equity investors in May, it included a clause allowing the government to benefit if the bank goes public.

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