Banking Law

Today's announcement that Texas investor Gerald J. Ford was pumping a half-billion dollars into troubled Pacific Capital Bank was interesting on a number of levels. First, it means that Ford's group grew tired of trying to break back into banking through the use of a shelf charter and the acquisition of failed banks from the FDIC as a "private equity" investor. As has been apparent for some time, the FDIC (and the Federal Reserve Board) have a bias against private equity and Ford's mama didn't raise no fool. He knew the sailing would be smoother once he was inside the system. A recapitalized Pacific Capital Bank, with a proven turnaround artist like Ford and his crew in charge, will be a bona fide player in buying failed banks going forward.

Second, he found a nearly busted bank, used his team's expertise to quantify the downside (at least enough to satisfy himself and his investors), and came up with a plan to have preferred stockholders (including the US Treasury Department as the holder of $180 million injected through a TARP investment), and subordinated debt holders take a heck of a haircut so Ford could buy the bank at a price he's decided will protect him from any future hole that might be dug by bank's lousy loan portfolio (which you can expect the bank will now deal with aggressively). No FDIC assistance will be required, which must make Sheila Bair a happy camper, although the Treasury will take a blow. However, the alternative for Treasury Department and the other preferred stockholders and subordinated debt holders was to recover nothing if the bank tanked, which the latest public filings by the bank indicated was a distinct possibility. At least this way they salvage something, and if Ford works his magic as he did with First Gibraltar and First Nationwide/Golden State "back in the day," the right they will be granted as part of the plan to purchase additional shares might make up, over the long term, for a good portion of their short-term losses. Although nothing is certain in this area, I can't imagine that Ford would have gone this far if he didn't have a pretty good idea that the necessary approvals will be forthcoming.

Unfortunately, a sour note was struck by accusations that word of Ford's investment might have leaked prematurely from some source, which leakage profited certain traders in options on the bank's stock. 

?It?s more than fishy,? Ophir Gottlieb, a trader and head of client services at Livevol Inc., a San Francisco-based provider of options market data and analytics, said of the put- trading surge. ?It?s completely anomalous.?

If there was wrong doing, I hope the Feds catch the crooks. Creative capitalists like Ford need to be encouraged to make more lemonade out of the lemons of distressed banks. As former Federal Home Loan Bank Board General Counsel Tom Vartanian observed, "There are a lot of these transactions out there percolating and to see some of them getting done is a very positive step in terms of recapitalizing banks.? Such transactions save banks, save jobs,  and help recapitalize the banking business without a further siphoning of the FDIC insurance fund. The last thing we need are leaches such as crooked short-sellers putting a damper on this activity.