Gerald J. Ford, who became a billionaire by purchasing distressed lenders during the last banking crisis, isn’t waiting around during this one for Sheila Bair’s Federal Deposit Insurance Corp. to offer him a deal.
After bidding unsuccessfully on several lenders seized by the FDIC, Ford said he’s pushing ahead with a $500 million injection for Pacific Capital Bancorp, a California lender that has said it may collapse. He’s among the private-equity investors who are now willing to buy banks without an FDIC guarantee on loan losses.
“We’re trying to do this one sooner rather than later,” Ford, 65, said in an interview yesterday. “We’ve been out there looking for a long time.”
Private-equity firms are going after live banks after complaining the FDIC put up too many obstacles and changed the rules for buying failed lenders, which are piling up at the fastest rate in two decades. Three days before Ford’s deal, private-equity firm Thomas H. Lee Partners LP agreed to pay $134.7 million for a stake in Sterling Financial Corp., a Spokane, Washington-based lender that’s still open after posting two annual losses.
Both deals depend on the U.S. Treasury Department agreeing to take a loss on the stake held by its bank bailout fund. The Treasury signed on to the Sterling deal yesterday, according to the bank.
“We view this as being a positive,” said Michael Krimminger, a special adviser for policy at the FDIC, about sales of banks that are still open. “It’s certainly for the best interest of the public and the FDIC and the deposit- insurance fund -- the least costly way is to make sure the bank doesn’t fail.”
Bair told CNBC on April 23 that the pace of failures may slow as sick lenders find capital to get off the agency’s 702- company “problem” bank list.
“There’s a growing sense that a lot of opportunity for private-equity deals with failed banks is gone,” said Chip MacDonald, a partner at Jones Day in Atlanta who specializes in bank deals. “There’s uncertainty around the FDIC’s private- equity policy statement, and a lot of hoops to jump through to bid.”
Private-equity investors hesitated to bid after the FDIC required their firms to maintain higher capital ratios and prohibited them from selling for at least three years. The rules were issued in August, then clarified with a set of “frequently asked questions” that was posted and withdrawn in December and re-released in January, according to a report from law firm Fried, Frank, Harris, Shriver & Jacobson LLP in Washington. That left investors to puzzle over “inconsistencies” with other federal agencies, the law firm wrote in January. The agency issued additional guidance last week.
“We’ve done these things for good reason,” Bair, chairman of the FDIC, said in an interview with Bloomberg last month. “We don’t want bidders coming in just for the benefit of a loss-share and a quick flip of the bank and make a quick profit and get out. We want people who are committed to running banks and serving communities.”
As for the reluctance of private-equity firms, Bair said, “maybe some of them don’t like those restrictions and so they complain, but I don’t think the rules have changed.”
Ford’s group was one of the first private-equity firms to seek official permission from regulators to buy failed banks, receiving a so-called shelf registration in November 2008. Several groups, some led by experienced bank managers, have raised funds to buy lenders from the FDIC. Most haven’t completed any deals; the largest private-equity purchases included banking operations of IndyMac Bancorp Inc. and BankUnited Financial Corp.
Investors may also be chasing distressed banks that are still open because they can avoid competitive bidding in an FDIC auction for closed lenders, said Thomas Vartanian, a partner at Fried, Frank.
“If you find an institution you think is a jewel, and all it needs is some new capital, then you can cut your deal with the management and shareholders, and you got it,” Vartanian said.
Ford’s group would get a 91 percent stake in Santa Barbara- based Pacific Capital. The deal gives Ford, of Texas, a chance to increase the fortune he built during the savings and loan crisis of the 1980s and 1990s by acquiring distressed banks and turning them around. Ford led investors who transformed California-based Golden State Bancorp Inc. into the second- largest U.S. thrift, which he sold to Citigroup Inc. in 2002 for $5.3 billion.
“We’ve been in the banking business on the West Coast before, and we liked it, and we think this is an outstanding franchise,” Ford said.
The Sterling accord calls for the bank to raise a total of $720 million and would give Boston-based Lee a 19.9 percent stake. The U.S. agreed to swap its $303 million stake for new securities valued at $75.8 million, Sterling said in a statement on April 29. Treasury spokesman Andrew Williams declined to comment and Richard Walsh Jr. at Thomas H. Lee didn’t respond to a request for comment.
At Pacific Capital, the Treasury would be required to exchange $180.6 million for common shares at about 20 cents on the dollar, according to a statement. Pacific Capital has told investors it may not survive without new capital.
Private-equity firms became wary of buying banks without government guarantees to cover losses after David Bonderman’s TPG lost $1.3 billion investing in Washington Mutual Inc. as the bank was trying to avoid collapse. The stake was wiped out when Seattle-based WaMu’s banking unit was seized by regulators in September 2008, the biggest failure in U.S. history.
Regulators may be less accommodating as the crisis recedes because they see the market for distressed banks improving, said Kevin Petrasic, a Washington-based lawyer at Paul, Hastings, Janofsky & Walker LLP and former counsel at the Office of Thrift Supervision. Meanwhile, private-equity firms and the investors who back them are less willing to tolerate the delays and extra work needed to deal with a bank that’s been seized, he said.
“There’s probably some pressure being brought to bear at the private-equity firms in terms of needing to deploy those funds,” Petrasic said.
To contact the reporters on this story: Dakin Campbell in San Francisco at firstname.lastname@example.org; Jonathan Keehner in New York at email@example.com; Nikolaj Gammeltoft in New York at firstname.lastname@example.org