FDIC Prodding Pensions to Invest in Failed Banks
Submitted by Leo Kolivakis, publisher of Pension Pulse.
In my last post on pension black holes, I discussed how Irish trade unionists has accused the Government of plundering the National Pension Reserve Fund to appease zombie banks.
On Monday, BusinessWeek published an article from Bloomberg's Dakin Campbell, Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash:
Federal Deposit Insurance Corp. is trying to encourage public
retirement funds that control more than $2 trillion to buy all or part
of failed lenders, taking a more direct role in propping up the banking
system, said people briefed on the matter.
Direct investments may allow funds such as those in Oregon, New Jersey
and California to cut fees for private-equity managers, and the agency
to get better prices for distressed assets, the people said. They
declined to be identified because talks with regulators are
Oregon’s retirement fund may
contribute $100 million as regulators seek “the support of state
pension funds to solve the crisis surrounding ongoing bank failures,”
Jay Fewel, a senior investment officer at the Oregon State Treasury,
said in a presentation at the fund’s Feb. 24 meeting. New Jersey’s fund
may also participate, said Orin Kramer, chairman of New Jersey’s State
The FDIC shuttered 140
lenders last year and expects the tally may be higher in 2010.
Regulators have avoided signing up private-equity firms as rescuers on
concern that they might take too much risk. Pension funds, whose 100
largest members manage $2.4 trillion, could provide capital to acquire
deposits and outstanding loans from collapsed banks, according to the
“The FDIC is constantly looking at structures where we can get the
greatest opportunity to tap into capital that we have not had the
success reaching through previous disposition methods,” FDIC
spokeswoman Michele Heller said in an e-mailed statement. “We welcome
and work with all investors.”
rules don’t prohibit pension funds from buying failed banks. Until now,
they have typically chosen to invest through private-equity firms using
limited partnerships, which gives pension funds little to no control
over the day-to-day management of the investments. They also pay
management fees levied on the amount of money committed as well as a
percentage of any profit.
examining a broad range of alternatives to take advantage of what I
believe are attractive transactions coming out of the FDIC,” said New
The state pension system faced a shortfall of about
$46 billion as of last year because of investment declines and a
failure to make full contributions, according to annual financial
Oregon State Fund
Oregon would invest in Community Bancorp LLC, a bank being formed by
Capital LLC, according to the Oregon presentation. Sageview
was founded by former Kohlberg Kravis Roberts & Co. executives
Scott Stuart and Ned Gilhuly. Sageview is looking to raise about $1
billion from pension funds and similar investors, the presentation said.
the structure makes sense, pension funds would be better off investing
in existing banks, said Chris Whalen, managing director of
Institutional Risk Analytics of Torrance, California. At those lenders,
management will oversee details of buying failed lenders and save
pension funds the time and effort needed to launch a new bank, he said.
“If they are really interested in playing this area, they should put
their money into a larger bank that’s already playing here,” Whalen
said. “If you look at the risk-reward and the distraction involved,
it’s not worth it” to back a new bank, he said.
Investing in distressed banks doesn’t always pay off, as the U.S.
Treasury Department learned with the Troubled Asset Relief Program. At
least 60 lenders skipped some of their promised dividends to the TARP
fund, according to SNL Financial, and a $2.33 billion stake in CIT
Group Inc. was wiped out last year when the lender went bankrupt.
Amegy’s Paul Murphy
Sageview, based in Greenwich, Connecticut, and Palo Alto, California,
would get yearly fees as an adviser and would also invest about $100
million of its own. Ruth Pachman, a spokeswoman for Community Bancorp,
declined to comment.
Community Bancorp will look
to buy three or four banks in the next three years and will be run by
Paul Murphy, the presentation said. Murphy built Houston-based Amegy
Bank into a $12.3 billion-asset lender over more than a decade, and
it’s now owned by Salt Lake City-based Zions Bancorporation.
“We’re pleased with the Oregon decision,” Murphy said in an interview.
He declined to comment further as the group is still raising capital
and in a “quiet period.”
Spokesman James Sinks at Oregon’s Treasury said the state is still negotiating its commitment, and declined elaborate.
After the credit crisis ate into private-equity returns, pension
managers started looking for ways to trim fees and boost returns. The
California Public Employees’ Retirement System, the largest U.S. public
pension fund, said in a Feb. 16 presentation that one of its goals is
to increase its “co-investments” in transactions alongside money
managers. That kind of structure could give the pension fund an actual
stake in firms purchased, rather than the private-equity firm’s buyout
fund, according to the people.
Known as Calpers,
the pension fund plans to “explore unique structures with select
general partners,” according to the presentation. The fund’s investment
portfolio was valued at $203.3 billion as of Dec. 31, according to the
Calpers Web site. Spokesman Brad Pacheco didn’t respond to a request
Regulators have been debating how
much leeway to give private buyers of failed banks on concern that
they’re more likely to put federally insured deposits at risk, or will
look to flip the bank for a quick profit.
Private-equity managed funds typically promise they’ll return funds to
their investors in about 10 years. Pension funds are aiming to fund
retirements that are decades away and thus can hold on to investments
longer, which would help ease the FDIC’s concern, said one of the
guarantees may soften the risk of investing public pension money in
distressed banks, Whalen said. When the FDIC sells a failed bank, it
typically shares a portion of the loan losses.
“Financially sophisticated people do not assume that banks have
recognized all of their real estate losses,” Kramer said, adding that
it can still be a bad deal if a buyer overpays for a deposit franchise
or if loans perform worse than expected. “We are in the early innings
for commercial real estate.”
thoughts on public pension funds investing in failed banks? I think any
way they do it, it's a recipe for disaster. I can just see the private
equity sharks raising funds to bid on failed banks. And even if pension
funds take direct control of these failed banks, do they really know
what's lurking on their books and how to operate a bank? I shudder to
think at what will happen to these investments if we enter a protracted
period of weakness in commercial real estate.
Finally, Richard Suttmeier was interviewed on Tech Ticker on Monday explaining Why Banks Can't Lend: U.S. Financial System "Not as Good as Wall Street Says":
the unemployment rate, durable goods orders or the Baltic Freight
Index. Veteran market watcher Richard Suttmeier says the FDIC quarterly banking profile is "the single most important leading indicator for the U.S. economy."
about 55 days after the end of each quarter, the FDIC report offers a
bird's eye view of lending activity in America, especially among
smaller Main Street lenders and small businesses. "It's a balance sheet
of our economy," says Suttmeier, chief market strategist at Niagara
International Capital and ValueEngine.com.
on the latest quarterly profile, for fourth-quarter 2009, the state of
the banking system is "not as good as Wall Street is saying.
Particularly when you get beyond the 'too big to fail' banks,"
Suttmeier tells Aaron in the accompanying clip.
Bad Banks Can't Lend As was widely reported, the most recent report showed the number of "problem" banks rose 27% in 2009 to 702 -- the highest level since 1993.
widely discussed is Suttmeier's concern that more than half of the
nation's roughly 8,000 banks "can't lend anymore" because of rising
levels of bad loans on their books. The problems are especially acute
in construction & development and commercial real estate loans, he
says, citing the FDIC quarterly report. Because so many of these loans
are delinquent, banks don't have the capital coming in to lend out and
thus are content to mostly sit on deposits, he explains.
can't sustain positive GDP growth without the construction market
turning around [and] banks getting rid of these bad loans so that they
can lend again," Suttmeier says. "When you have light demand for loans
and loans on the books deteriorating while the economy's going up --
something's not right."
FDIC under strain.
Meanwhile, the Federal Deposit Insurance Corp.'s fund has been
dwindling, hitting a $20.9 billion deficit as of Dec. 31, as the AP reports.
Suttmeier says TARP funds repaid by bailed out banks should be used to
shore up the FDIC's fund, rather than raising fees for banks, which
will leave them with less capital to lend.
To be clear, the
FDIC has a $500 billion line of credit with the U.S. Treasury, and
Suttmeier doesn't see much risk of the FDIC changing (or being unable
to cover) its $250,000 guarantee for individual deposits. Suttmeier
isn't an alarmist and doesn't see run on the banks as started to occur
in late 2008 in the depths of the global credit crisis. However, one
trend is clear: "We have to find funding for the smaller banks," he
Nothing less than positive GDP growth and a sustainable U.S. recovery are at stake.
the interview below and relay it back to why the FDIC is prodding US
public pension funds to invest in failed banks. Will this be the next
huge financial blunder? Sure looks like it.