Thread: Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash

(another source title: "FDIC Want Your Retirement Cash to Save Banks: Bloomberg")

Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash

March 08, 2010, 1:00 PM EST

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By Dakin Campbell

March 8 (Bloomberg) -- 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.

Oregons 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 funds Feb. 24 meeting. New Jerseys fund may also participate, said Orin Kramer, chairman of New Jerseys 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 dont 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.

Weve been examining a broad range of alternatives to take advantage of what I believe are attractive transactions coming out of the FDIC, said New Jerseys 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 Sageview 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.

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 thats already playing here, Whalen said. If you look at the risk-reward and the distraction involved, its not worth it to back a new bank, he said.

Investing in distressed banks doesnt 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.

Amegys 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 its now owned by Salt Lake City-based Zions Bancorporation.

Were 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 Oregons 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 firms 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 funds investment portfolio was valued at $203.3 billion as of Dec. 31, according to the Calpers Web site. Spokesman Brad Pacheco didnt respond to a request for comment.

Regulators have been debating how much leeway to give private buyers of failed banks on concern that theyre 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 theyll 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 FDICs 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.

--With assistance from Cristina Alesci and Michael J. Moore in New York and Michael Marois in Sacramento, California. Editors: Rick Green, Dan Reichl

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

To contact the editors responsible for this story: Alec McCabe at amccabe@bloomberg.net; Rick Green at rgreen18@bloomberg.net

http://www.businessweek.com/news/2010-0 ... -cash.html

FDIC wants pension funds to prop up failed banks

By Stephen C. Webster
Monday, March 8th, 2010 -- 8:10 pm

Over 140 U.S. lenders folded in 2009 alone. To remedy the financial void left in their wake, the Federal Deposit Insurance Corporation wants public pension funds, which safeguard the retirement funds of millions, to buy in part or in whole the banks that couldn't manage to keep their depositors' funds.

"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," anonymous sources reportedly told Bloomberg News.

In a speech to the National Association for Business Economics Washington Policy Conference, FDIC Chairwoman Sheila Bair outlined what she called "a pre-funded resolution mechanism," but did not specify what exactly that is. She instead said it would be "similar to the FDIC's receivership authority for failed banks," exposing only shareholders to risk, as opposed to the bank bailouts that saw billions of taxpayer dollars funneled into a near-crippled financial system.

"Shareholders and creditors would bear the losses, not the public," she explained. "But, the process would be orderly and help prevent a catastrophic collapse of other firms."

"From this speech, it's a little unclear whether or not Bair has a more simplistic view, where a resolution authority would just close troubled firms," wrote The Atlantic's staff editor, Daniel Indiviglio. "Right now, most banks are just wound down by the FDIC with failure looming. While that's one option, if the market could be saved from some additional losses associated with outright failure without taxpayers bearing the cost of keeping a firm going, then I don't see why regulators wouldn't want to include that option as well."

http://rawstory.com/2010/03/fdic-pensio ... led-banks/

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