Calling in the Vultures

May 22nd, 2009 by Phil Mattera

vulturesOnly one day after Treasury Secretary Timothy Geithner told the Senate Banking Committee that the nation’s financial system is “starting to heal,” bank regulators took a step indicating that parts of the system are still festering. The FDIC announced that it had seized BankUnited, a struggling institution in Florida with assets of about $13 billion. It was the biggest bank failure this year. The collapse will cost the insurance fund about $4.9 billion.

BankUnited’s demise was expected for some time. The company’s big bet on option adjustable-rate mortgages backfired when the housing market in the Sunshine State began to shrivel. Although BankUnited avoided the subprime market, many supposedly prime customers with those option ARMs, which allow one to lower interest payments in the first years of a mortgage by adding to the principal, found themselves seriously under water and started to default.

But what’s most significant about the takeover of BankUnited is who the FDIC got to buy the bank: a private-equity group led by John Kanas, the former head of North Fork Bank, who has joined forces with prominent vulture investor Wilbur L. Ross Jr. Also involved are funds managed by the Carlyle Group and Centerbridge Partners. In other words, the FDIC delivered BankUnited’s depositors and employees into the hands of aggressive private-equity firms.

The FDIC announcement casually noted: “Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments. In the near future, the FDIC will provide generally applicable policy guidance on eligibility and other terms and conditions for such investments to guide potential investors.” In other words, the FDIC realizes it is doing something risky, but it will figure out its policy after approving the deal.

Geithner previously raised the prospect of subsidizing private-equity firms and hedge funds to buy up the toxic assets held by banks. Now regulators are putting a bank itself in the hands of those wheeler-dealers.

Particularly troubling is the role of Ross, who has a long history of bottom-feeding in industries such as textiles, steel and coal. In the latter sector, his International Coal Group was the parent company of the Sago mine, where a 2006 explosion resulted in the deaths of a dozen miners. The mine had been repeatedly cited for safety violations.

The BankUnited deal could open the door to a wave of bank takeovers by private equity firms, which are not known for their enlightened management practices. If you think banks are run irresponsibly now, just wait until the vultures are in charge.

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