Busted Banks On A Thursday Night

For once, the FDIC didn't wait until the weekend to pull the trigger on a failed bank, conducting the operation last night. But two other things make the failure of Coral Gables, Florida-based BankUnited very, very different. One, it's the largest bank failure in 2009, BankUnited had a hefty $12.8 billion in assets, over $8 billion of which were in deposits. Two, the FDIC was able to immediately find a buyer for BankUnited.

WL Ross & Co., Blackstone Group LP and Carlyle Group’s purchase of BankUnited Financial Corp., the largest U.S. bank to collapse this year, came with a signal from regulators that they may be willing to let more buyout firms snap up banks as failures soar to a 15-year high.

The Federal Deposit Insurance Corp., citing the interest of private-equity firms in buying banks in receivership, said yesterday that it will soon provide “policy guidance” for potential investors. Spokesman David Barr declined to elaborate on the statement.

“The FDIC’s guidance will address the issue of safety and soundness in private equity deals,” said Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut School of Law in Hartford. Regulators “will probably ask for greater assurance that the private equity fund will stand ready as a capital backup if the depository institution becomes undercapitalized.”

Carlyle and Blackstone, the world’s two biggest leveraged buyout firms, are among those considering buying banks on the cheap after global losses from the credit crisis topped $1.4 trillion. The FDIC in January agreed to sell IndyMac Bank to private-equity investors after failing for five months to find a buyer among the lender’s stronger rivals. BankUnited’s winning bidders are injecting $900 million into the Florida lender.

These leveraged buyout firms are taking clear advantage of the FDIC's largesse, selling these busted banks for pennies on the dollar. Look for a lot more of this to come in 2009 and 2010 as the number of failed banks continues to rise sharply...and the number of buyout firms getting into the banking business increases.

After all, if these companies get into banking, they become eligible for billions in TARP money and trillions in interest free government loans should these bad banks become too much of a drain on their leverage. I believe they will, there's still trillions of bad commercial and residential mortgage bets out there, and getting a seat at the taxpayer trough now means not having to fight for one later when things get worse in 2010.

It's a damn smart plan for these firms to follow. They know now they belong to the "too big to fail" category with banks under their belt, and that means they can take all the crazy risks they want to. They know you and I are now on the hook should things go bad, and the government knows they have to help these firms out or risk losing all the private investment in the failed financial system. It's an implied guarantee of huge rewards if the risks pay off (like buying a failed bank with billions of exploding real estate time bombs on the books), and free taxpayer money should the plan backfire.

God, that's a f'ckin beautiful scam, it is. You really have to admire it. Either way, these leverage firms really can't lose, and they can use that implied guarantee to leverage some truly crazy deals. These guys will be falling all over themselves to get the next failed bank once the FDIC releases its guidance on the practice. It's a pyramid leverage scheme with the full faith and credit of the US taxpayer backing it. You don't get much better than that.

"Moral hazard"? Gee, what moral hazard?