Banking Law

A recent article by Miami Herald staff writer Martha Brannigan captured some interesting human interest angles on a few of the private equity players who are buying failed banks from the FDIC, particularly those in Florida and Georgia, two states that, according to one bank analyst, have within their borders a quarter of all of the troubled FDIC-insured institutions in the country. To me, the most telling observation was how John Kanas, backed by the legendary Wilbur Ross, got in early and by being one of the first piggies to the through, lapped up a yummy deal of a type that we may not see again.

Kanas' deal for BankUnited, the largest Florida-based bank, marked only the second time regulators allowed private equity firms, which pool money from wealthy investors, to own a bank.

Since then, dead banks auctioned off by the FDIC have become all the rage among the smartest money on Wall Street. And Florida and Georgia are emerging as the El Dorado of opportunity to pick up failed banks.

Once something has become "all the rage," it's likely that the sweetest juice may have been squeezed from the berry. At least, that's the way it seems to work in the limited experience of this bloviator.

Kanas pounced on the opportunity early in the dark days of the recession when few were willing to act. After months of shopping BankUnited to potential buyers, the FDIC drew only three bids. Kanas got the assets for a 24 percent discount to face value.

The new BankUnited already has posted fat profits: $163 million between May and the end of 2009, a 26-percent return on investment.

That's sweet even for private equity firms, which expect fat returns. The BankUnited deal has helped lure other nonbank investors to look at failed banks.

Former Kanas colleague and current competitor Daniel Healy gives Kanas a hat tip for being the first kid on the block to bring home a shiny new bike.

Healy acknowledges that Kanas -- acting early -- got the sweetest deal from the FDIC. ``The BankUnited deal was the deepest discount,' he says.

When BankUnited failed, the bank regulators were just cracking open the door to private equity outfits, and few firms were geared up to navigate the regulatory maze. Meanwhile, most banks were too focused on their own problems to think about bidding.

``If that deal [for BankUnited] was happening today, there would be more strategic buyers [traditional banks]. But it didn't happen today. It was during a much deeper time in the crisis,' says Jimmy Dunne, senior managing principal of Sandler O'Neill + Partners, an investment bank specializing in financial institutions.

Indeed, the FDIC already is getting less generous. Until recently, the agency has agreed to shoulder 80 percent of loan losses on troubled portfolios with an added promise that after a certain threshold, the agency would cover 95 percent of losses. That leaves a buyer to swallow only 5 percent if things really go south.

But the FDIC recently decided it will no longer offer the 95 percent protection. So far, no deal has had enough losses to hit that threshold anyway.

Kanas, for his part, won't crow about his good fortune. ``Frankly, we're very pleased,' he says solemnly. ``We've met and or exceeded all of our expectations.'

"Frankly, we're very pleased" sounds a lot more dignified than "Whooo-hoooo! We struck the mother load!" That's what I think he meant, reading between the lines.

There's no question that when the economy's in turmoil, those with vision, guts, money, and the ability to run the 40 in 4.3 or under generally win the race for the best return-on-equity over the short haul. On the other hand, the fact that there's so much smart money still chasing these transactions doesn't mean that the returns of those entering the race now aren't going to be robust. In fact, in most cases, they're likely to be good. However, investors have to adjust to the fact that hitting a ground rule double is likely going to be as good as it gets from here on out. Stroking "the long ball" out of the park, as Ross, Kanas, and their group has done (or as the private equity players who bought the remains of IndyMac have done) is not something that investors ought to shoot for if they expect to play at all. Otherwise, they'll bid too low to win anything, and, unfortunately, will strike out entirely.

I think the days of the "ultra rich" deals are over. Private equity is just going to have to settle for "filthy rich" and learn to live with diminished expectations.