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FDIC Prodding Pensions to Invest in Failed Banks
- Bank Failures
- California Public Employees' Retirement System
- Chris Whalen
- CIT Group
- Commercial Real Estate
- Credit Crisis
- Federal Deposit Insurance Corporation
- Gross Domestic Product
- Institutional Risk Analytics
- Main Street
- Private Equity
- Real estate
- recovery
- Reserve Fund
- TARP
- Treasury Department
- Unemployment
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:
The
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
confidential.
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
Investment Council.
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
people.
Welcome Mat
“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.”
Current
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.
“We’ve been
examining a broad range of alternatives to take advantage of what I
believe are attractive transactions coming out of the FDIC,” said New
Jersey’s Kramer.
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
reports.
Oregon State Fund
Oregon would invest in Community Bancorp LLC, a bank being formed by
SageviewCapital 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.
While
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.
Calpers Presentation
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
for comment.
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.
Longer Horizon
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
people.
FDIC
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.”
My
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":
Forget
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."
Released
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.
Based
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.
Less
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.
"We
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
says.
Nothing less than positive GDP growth and a sustainable U.S. recovery are at stake.
Watch
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.
»
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Ok, not if but when, the point is that unlike banks, pensions can keep assets on their books "over the long-term". But shit is shit, whether it is valued quarterly or annually, makes no difference, it still stinks! What I find sneaky in all this is that it's just a backdoor way to prop up failing banks. The US government is behind this, no doubt pandering to the banking and private equity lobbies.
The comment about pension funds being able to hold onto investments for more than ten years is a bad joke. Many of these funds have lost heavily in the stock market and need funds NOW to pay for CURRENT expenditures and the only way to get that is to invest heavily in the next great thing. Unfortuantely, that seems to be VEGAS BABY where you roll the dice and hope that what you have left will grow in a single throw or two.
Once the pension funds start appearing as road kill, the AARP folks will scream bloody murder, but the killer will be long gone in the bahama's.
Each of us needs to take responsibility for our own retirement security. The days of relying on others for the golden years is long gone, it's every man, woman and child for themselves and thier family
I get it: A pension fund has a CRE problem, so it invests in a bank with a CRE problem. Now, this is finally beginning to make some sense!
LMFAO! Couldn't be summarized any better!
Hell, they couldn't get the govt to plow our social security into the markets, so I guess this is one other approach (payback?).
"if we enter a protracted period of weakness in commercial real estate."
If? That is rich, Leo!
“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.”
And herein lies the problem.
First Banks, then Money Markets, now pension funds....
The government is running out of deep pockets to turn to. After IRAs and 401(k)s are tapped, that's pretty much it.
Funny how no one talks about keiretsu anymore. That's just what we are building here.
Was wondering how long it would take the banks to realize there was a big pile of money and dumb government officials sitting there.
Rally on.
Recipe for disaster. When the government has an investment idea or advice run the other way.
Good work Leo!
Noted the NY Times chimed in this morning. Parroting your concerns about unrealistic returns, now being chased with riskier strategies.
Looked in vain for your acknowledgement.
I agree with this excellent contribution by Leo. I'm sure he saw the NYT article today. There's even a mention in that article that public pension funds are now moving into the VEGAS strategy.......doubling down with riskier bets to chase mounting losses. Better known as " chasing".
These pension funds will be as good at managing failed bank investments as they were with CRE. But I suppose when you are already 50-65% underfunded, you might as well go kamikaze all the way. A round of sake for the house !!
These managers already know that "The Pension Fairy" doesn't exist so they may as well grab every fee, bonus and all the unders (under the table payments) they can. The plan mangers have found that "The Other People's Money Fairy" is real - and it's a thing of beauty just not for the guy that is forced to contribute.
Keep the valuable posts coming Leo - the private sector is getting scammend on thier pension contibutions but even WORSE is that they will then be forced to make up the shortfall for the lucky public sector minions.
The planned transaction makes no sense, except to generate fees and suit the FDIC's purposes. The losers are the pensioners, as usual. Any one of us could plan Oregon's investments over coffee at Dunkin' Donuts once a year for $2,000. The FIRE economy would burn out.
I'd do Oregon's planning for free, from my favorite office location underneath the Hot Doughnuts Now sign at Krispy Kreme.
Sadly, they are shutting down the Lorton plant. Another one bites the dust.
If you know how many businesses and people are biting the dust check out dailyjobcuts.com
Bair-Bottom. Sheila Bair-Bottom.
Would you invest your savings by buying an auto repair shop if you didn't know anything about fixing cars? OK maybe you hire someone who does know but you still need to be confident in his expertise and certain of his trustworthiness.
Now magnify that question as a pension fund manager, scratch that, as a pension fund investor. Are you sure that your pension fund managers can hire someone who is competent to run a bank and do you trust the integrity of both sets of management? I thought not.
Let's call this what it most likely is, a pension fund gang rape in the making.
It's only a blunder if you think the point *isn't* to turn pension funds into bagholders.
Besides, the GLOBAL LIQUIDITY RALLY is going to make all these assets the pension funds are buying $$money good$$
However, one trend is clear: "We have to find funding for the smaller banks," he says.
Nothing less than positive GDP growth and a sustainable U.S. recovery are at stake
Ahahahaha! Really now? TBTF concern trolling on the part of the pearl clutchers in the government is a scam. I don't know the numbers but I'd bet my underwater mortgage that the top 5 banks have just as much market share and power as they did before the crisis---and you can thank TARP for that. GS still a bank holding company asking for free money from the Fed window? I thought so.
CRE is in the process of going kaplooey and most of the loans backing it up are held by small community banks who don't have the luxury of selling it off to the government version of Enron's SIVs---Fannie, Freddy and FHA.
Good luck with that when the rapture comes.
Wow just at the same time TBTF banks were eying the purchase of states. This makes about as much sense as pension funds buying banks. Desperation has set in.
Insanity continues globally ... from the Wall Street Journal:
NAIROBI, Kenya—The International Monetary Fund on Monday unveiled plans for an African "green fund," an effort that would move the group outside its traditional mandate to address what its director said is an unfilled need to help poorer nations cope with climate change.
IMF managing director Dominique Strauss-Kahn said the fund would provide a potential aid buffer for countries on the continent that may bear the brunt of global climate change, and have the capacity to raise $100 billion per year by 2020. Mr. Strauss-Kahn, who said he has discussed the idea with the fund's member states, said the IMF ...
Africa is the next frontier in the capitalists conquest of the world. Capitalism is a Ponzi scheme and as such needs ever new participants to not implode. Africa is next.
Get into debt even more, Africa:
Normally the IMF doesn't give away funds, it lends funds out at an interest.
If capitalism is a ponzi scheme, so is any other form of market/commerce. The Ponzi is who makes the rules.
No, only those whose foundations lie on Ponzi-like bases. If any scheme (insert your favorite one here) asserts that there can be infinite growth on a finite planet, well, then That's a Ponzi premise...
Actually, oligarchy of wallstreet and the politicians or Crony capitalism is more accurate!