The 1988 rescue of First RepublicBank Corp. of Dallas -- the most expensive bank bailout ever -- likely will cost double the original estimate of $2 billion to $3 billion, largely because of "preposterous tax breaks," a congressional report said yesterday.
The report, prepared by the House Budget Committee's task force on urgent fiscal issues, said the bailout will cost the Federal Deposit Insurance Fund between $4.7 billion and $6.7 billion. The FDIC's most recent estimate is $2.9 billion.
The study also criticized the Federal Deposit Insurance Corp.'s handling of the second-most expensive bailout, the $2.7 billion rescue of MCorp of Dallas in 1989.
But, in particular, it faulted the FDIC for arranging the takeover of First Republic without considering the $960 million in tax breaks that would go to the buyer, NCNB Corp. of Charlotte, N.C.
Rep. Charles Schumer (D-N.Y.) chairman of the task force, said the agency primarily considered the cost to its insurance fund, which is financed by premiums paid by banks, rather than benefits that would come out of taxpayers' pockets.
Gail Ellis, IRS spokeswoman, said the agency would have no comment until it could review the report. Alan Whitney, FDIC spokesman, said, "Under the law at the time, our response was to pick the bid that was the lowest cost to the FDIC."
The breaks essentially allowed the NCNB to double-dip, Schumer contended. The FDIC provided $1.3 billion in cash and forgave a $1 billion loan, wiping out First Republic's embedded losses. Yet, the tax breaks, approved in two "private letter" rulings by the Internal Revenue Service, allowed NCNB to deduct the losses from future earnings.
Schumer said, however, that he does not advocate overturning the deals. If the government breaks the contracts, it would discourage bidders from trusting the government's word in the future, he said. The S&L bill, passed a year after the First RepublicBank deal, eliminated many of the tax breaks NCNB is using.
In hindsight, Schumer said a competing bid from Wells Fargo & Co. may have been cheaper because it would have returned 75 percent of the tax breaks to the FDIC fund.
In the MCorp transaction, Schumer contended the FDIC should have accepted a bid from Kohlberg Kravis Roberts & Co., a firm specializing in using junk bonds for corporate takeovers.
The report provided no direct comparison of the bids, but it said Kohlberg Kravis was willing to invest $517 million of its own money, compared with $375 million from Banc One.
It said Kohlberg Kravis was rejected primarily because of FDIC concerns about public reaction to regulators dealing with a junk bond firm.