In August, the FDIC reluctantly made it easier for private-equity groups to buy failed banks after the number of problem banks rose to 416 at the end of June. I say reluctantly because the FDIC prefers to sell failed banks to people with a track record in the banking industry. Now there are some new kids on the block creating stiff competition for the the private equity firms -- former bank executives working with Wall Street firms to form "blind pools" to buy failed banks.
That's good news for everyone but the private-equity firms. Not only will former bankers be more attractive as buyers to the FDIC, the private-equity firms expect the blind pools to drive up prices, making the purchase of failed banks less attractive. Even when the FDIC agreed to make it easier for private-equity firms to buy failed banks, it added a caveat to prevent them from quickly flipping the banks: It required investors to maintain a bank's minimum capital levels for three years.
There were 120 failed banks as of Nov. 6, and the FDIC is finding it harder and harder to find buyers for them. That's why it needed to open the door to private investors, and now seems to have put out a welcome mat for these blind pools. The former bankers with money from the blind pools get banking charters as bank holding companies; then, they are ready to start bidding on banks.
One example of such a holding company is NBH Holdings Corp., which was created when former executives of Citizens Financial Group raised $1.15 billion in a private placement. Seventy investors agreed to the blind pool, which means they have no say over what the firm decides to buy. NBH doesn't have a banking charter yet, but has submitted an application to become a bank holding company.
According to The Wall Street Journal, another group trying to form a bank holding company includes a trio of banking veterans: former J.P. Morgan Chase & Co. Chief Executive William Harrison, former Wachovia Corp. CEO Robert Steele, and former Hibernia Corp. CEO Herb Boydstun. Wall Street firms such as Goldman Sachs (GS) and Deutsche Bank AG (DB) are forming investment pools to fund acquisitions by former bankers.
Billionaires are getting in on the action as well. For example, financial executive Andrew Beal got approval to form a bank that could acquire a failed or failing Florida bank. He hasn't won a bid for a bank yet, but his application to the Florida Office of Financial Regulation on Oct. 19 was given an emergency order of approval on Nov. 5, quickly clearing the way for him.
Beal could acquire many Florida banks. Forbes ranked him the 52nd-richest American in 2009 with a net worth of $4.5 billion. He is chairman, CEO and sole shareholder of Plano, Texas-based Beal Financial Corp., which owns the Beal Banks in Plano and Las Vegas. His existing banks operate as wholesale banks. They acquire unappealing loans from their originators at a discount, and work to make money on them. They don't make loans directly to consumers and don't offer checking accounts.
Private-equity firms are well known for buying up companies, selling off their assets to raise cash, and flipping them after their value has been destroyed. Clearly, the FDIC doesn't want to risk making a bad situation worse by allowing a lot of banks to be bought up cheaply by private-equity firms that have little interest in running banks long term. Ex-bankers using "blind pools" may not be the FDIC's first choice of buyers, but they are probably a better choice than many private-equity firms.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.
What Is Your Risk Tolerance?
Answer the question "What type of investor am I?".View Course »