Here's a story about a bank that failed, got rescued, was resuscitated, and made its private equity investors more than 100% on their money, all the while costing the FDIC around $5.9 billion.
It's not a story about a failed bank… although it is.
It's not a story about how smart the bank's private equity "rescuers" were… although it is.
It's not a story about how the FDIC is such a great savior of banks.
Or that that moral hazard exists manifestly because the FDIC is a tool (not as in a tool used to fix something) that lets banks run hog-wild… although it is.
This is a story about how nothing has changed and why another bank crisis is coming…
They "Save" You Money by Inflating Loss Estimates
Back in early 2009, BankUnited of Miami Lakes, Fla., was insolvent and going under. The FDIC – that's the Federal Deposit Insurance Corporation, which bails out depositors and whole banks when things go terribly wrong – tried to sell it.
BankUnited had stuffed itself with bad bets on option adjustable rate mortgages (ARMs). Those are mortgages that give borrowers the option to pay principal and/or interest every month – or not – and increase the total owed, which would later be subject to higher interest rates.
Nobody wanted to bid on the bank.
By May 2009, the FDIC was desperate. They figured closing the bank would cost them $6.4 billion. They called John Kanas, who was grilling outside his Long Island home.
John Kanas is a brilliant banker. In 30 years he built Melville, N.Y.-based North Fork Bank into a profitable machine. Kanas smartly sold it at the height of the market in 2006 to Capital One for $13.2 billion. Kanas made well over $200 million on the sale.
The FDIC knew Kanas and they knew he was working with billionaire Wilbur Ross of WL Ross and Company. The two were interested in getting into the distressed bank market. Kanas welcomed the call. They were ready to offer the FDIC a deal.
It was a sweetheart deal…
While the investors put up just over $900 million in capital, the FDIC kicked in $2.2 billion in cash, would reimburse 80% of any losses on the first $4 billion at risk, and would for the next 10 years cover 95% of all additional losses.
Of course the investor group didn't have to think about the terms, as those were their terms.
They had studied the sweetheart deal the FDIC made when it sold IndyMac Bank to another clever group of investors earlier in the crisis and knew how to deal.
Fast forward to 2011. With the help of the FDIC and their ongoing rescue of banks across the country, and with the extraordinary help of the Federal Reserve – which, in case you don't know, is the tool of private banks in the United States (that's "tool" as in they fix bank balance sheets, flooding them with free money and winks from Congress), BankUnited under John Kanas was flush enough to sell its shares to the public in an IPO that valued the bank at $2.7 billion, or triple what the privateers put up in capital.
Just last week the investor group, in the last of a series of secondary offerings, said goodbye to BankUnited (NYSE: BKU) and cashed out, having more than doubled their money.
The FDIC, on the other hand, took at least a $5.9 billion hit on the deal. Well, at least that's what they claim, which makes them look "smart" because they had projected a $6.4 billion loss if they actually closed the bank.
So, what does this story tell us? It tells us a lot.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.