As we have recently noted, the federal banking agencies have worked together to expand the pool of investors eligible to bid to acquire failing depository institutions. See our 21st Century Money, Banking & Commerce Alert entitled “OCC Approves Shelf Charter for National Banks to Encourage New Investment” (Nov. 25, 2008). The Federal Deposit Insurance Corporation (“FDIC”) has recently modified the receivership process in less obvious ways that also may have important ramifications for investors.
Recently, the Office of Thrift Supervision closed Downey Federal Savings and Loan Association, F.A., Newport Beach, California, and PFF Bank and Trust, Pomona, California, and appointed the FDIC as receiver. The FDIC sold the institutions to US Bank, N.A., Minneapolis, Minnesota. Downey and PFF are only two of several US depository institutions to fail this year. However, certain aspects of these receiverships add some new elements that hearken back to the late 1980’s and early 1990’s and the large variety of resolution transactions done then.
The FDIC invited bids on these two institutions as a single franchise to create a larger recovery than might otherwise be achieved by selling them separately. The FDIC has not combined failed institutions in an immediately executed purchase and assumption transaction for some time. The FDIC, as it deals with a growing volume of closed banks and thrifts, can be expected to use this and a variety of resolution models whenever the opportunity arises and to be increasingly aggressive in structuring and restructuring banking franchises to attract bidders. Indeed, since September, it has on three occasions made findings of a systemic emergency as required under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which it had never done before, in order to intervene on an open bank basis to support the proposed but terminated Citibank, N.A., acquisition of Wachovia Bank, N.A., the Temporary Liquidity Guarantee Program and the assistance package provided on November 23, 2008, to Citigroup jointly with the Treasury and the Federal Reserve.
US Bank also agreed to retain substantially all assets of the failed institutions, subject to a loss-sharing arrangement with the FDIC. US Bank’s retention of assets substantially reduced the initial cost of the receivership for the FDIC, as compared to a more typical transaction in which the successful bidder is permitted to cherry-pick only a few customer relationships and leave the agency to hold and dispose of a large majority of the assets. Preserving liquidity and reducing administrative overhead are important objectives of the FDIC at this time, and loss-sharing or other arrangements that encourage bidders to retain substantial amounts of assets should become increasingly common.
US Bank also agreed to implement a loan modification program at Downey and PFF based on the program that the FDIC introduced as conservator of IndyMac Federal Bank, F.S.B. That loan modification program is also a part of the joint assistance package provided to Citigroup. The FDIC should be expected to use its leverage as receiver whenever possible to push for the program’s adoption by successful bidders.
We expect to see continuing developments in the type of transactions approved, the nature of acquiring parties, and types of assisted transactions that are acceptable as the current financial crisis continues to require creative approaches in order to husband the funds used in such transactions.