Friday, May 22, 2009

BankUnited Seized By FDIC, Private Equity Consortium Gets Sweet Deal

BankUnited, the largest independent bank in Florida that specialized in that low-risk business of lending money to foreigners so they could buy properties in Florida during the housing bubble, was finally laid to rest by the FDIC. The FDIC has been looking for a buyer for the beleaguered bank for months, and conducted its auction yesterday. Although the FDIC was hoping to find a legitimate buyer, no bidders emerged that were willing to acquire the failing financial institution without massive loss guarantees. The winning bidder of the carcass of BankUnited was a consortium of private equity investors including Blackstone, Carlyle, Centerbridge and WLRoss yesterday. With assets of nearly $13 billion, BankUnited is the 34th and largest bank failure of the year, and is second only in size to IndyMac’s colossal failure last year.

On the surface, it should seem like a huge relief that the FDIC found a buyer for this large banking dud. That would certainly seem to be the case if the private equity buyers weren’t getting a ridiculously sweet loss guarantee from the US government. The government will take 80% of the first $4 billion in losses and 95% of any remaining losses. The next time I make any investment decision I’m calling the FDIC to see if I can arrange some sort of guarantee where the federal government eats around 90% of my losses, leaving my only risk to be that I break-even instead of make a mint. Oh sure, the FDIC will receive warrants giving it a share of any future upside, but the details on how much it will receive are scant, and it can’t possibly make up for the fact that the government is taking nearly ALL of the downside. Yes, the private equity firms are putting $900 million of equity into the bank and relieving the FDIC from the burden of having to wind down another large bank, but really, is all of that worth $10.7 billion in potential losses?? Seriously, why is the FDIC giving massive loss guarantees to private equity firms? Somehow this arrangement is still billed as a private sector deal with the FDIC claiming that the deal “is projected to maximize returns on covered assets by keeping them in the private sector.” But the truth is that, once again, only the profits go to the private sector, our rapidly dwindling deposit insurance fund gets to eat the losses. It’s “heads I win, tails you lose” all over again. Sadly, this is what our private sector is evolving into, only if you are a well-funded, politically connected finance firm, of course. The FDIC never called me to ask if I wanted to bid and I definitely would’ve tossed my hat into the ring with terms like these. At least the FDIC was approved on Wednesday to borrow $100 billion from the Treasury if it has a shortfall in its insurance fund. That piece of legislation couldn’t have been signed into law soon enough.

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