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Bank Insurers Bet It All at the Deal Table… With Your Money

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.

The deal, backed by Kanas and Ross, drew in private equity partners Blackstone Group LP (NYSE: BX), Carlyle Group LP (Nasdaq: CG), and Centerbridge Partners LP, a private investment firm.

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.

Join the conversation. Click here to jump to comments…

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 Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. 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.

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  1. G Roberts | March 18, 2014

    It's not about common sense, although it is.

    The world is now complex, so complex that simplicity has been removed from the business vocabulary — and yet we will be going back to simplicity when all this nonsense crashes, which is inevitable now.

    Personally I am excited to see this foolish world get back to common sense. It will be coming.

  2. Marcel Thevoz | March 18, 2014

    Thank you for telling us this story at a time when income inequality is on the agenda…
    reforming the system is bound to happen sooner or later and the road to integrity
    will be paved by the disappearance of a greedy cohort of profiteers….all of them.

  3. GILMOUR53760 | March 18, 2014

    Another well presented case of where our 'all-knowing' government thinks it has a 'fix' for every given situation and, because that 'fix' is never fully thought out, problems are created and compounded by bureaucratic ineptitude. We the taxed are always the ultimate 'backstop' for this mindless behavior of elected 'leaders'(?).

    Maybe the next election should be to vote them all out. That will not happen because too many voters are obsessed with the 'freebies' paid for by someone else's tax dollars or borrowed money.

    Your solution of getting the government out of the bank insurance business and making banks responsible for their behavior is appropriate and obvious. The primary reason common sense will not prevail, as you have presented previously, is that the politicians are in bed with the banks; and these officials are so enamored with their own self-importance and keeping their jobs there is a reluctance to admit that 'the system is flawed' — because of them.

    Thank you for your enlightening incite. Bob G

  4. jordy | March 18, 2014


  5. Robert in Vancouver | March 19, 2014

    Canada's banks are operated similar to Shah's suggestions. Plus they are not allowed to get into bed with shady investor groups, or partake in risky activities like US banks often do.

    Canadian banks have a government charter that outlines the way they operate and the limits of activities. In return for following the charter, the government prevents new competition to the existing big 6 banks plus some credit unions.

    So Canadian banks are boring but they do what banks were intended to do, take deposits and lend money to qualified borrowers. When a bank lends money out for a mortgage, that bank actually holds that mortgage on their books. They can't slice and dice it, rename it, then sell it wholesale to Goldman Sachs who then re-sells it to some investors in Europe.

    If President Obama wanted to do something really good for the USA, he would have changed the whole banking system instead of the whole health care system.

  6. estephen B esteve | March 20, 2014

    apologise pls giv them the important my retirement not for 2015 this year 2014 pls be Conseder my decission tyhank you…

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