July 1, 2009
Gibson, Dunn & Crutcher is closely monitoring risks and opportunities arising from the recent and dramatic reshaping of our capital and credit markets. We are providing updates on key transactions as well as regulatory and other legal developments that we believe could prove useful as financial institutions, investors, financial sponsors and other entities navigate these transformative times.
This update discusses the recently disclosed bids in the Federal Deposit Insurance Corporation’s May 2009 auction of BankUnited Financial Corp. The bids show that the "highest" bidder did not necessarily win the auction, and that the FDIC’s decision making process is less formulaic than might be expected.
Auction Bids Publicly Disclosed Following Embargo
On June 25, 2009 the FDIC publicly released for the first time the formerly sealed bid forms submitted on May 19, 2009 by all three bidders in the auction for BankUnited Financial Corp. The FDIC made these bid forms available through its Freedom of Information Act Service Center. The documents provide insight into the FDIC’s auction process, and in particular confirm that, at least in this case, submitting the arguably "highest" economic bid did not guarantee success before the FDIC.
The FDIC announced the closure, receivership and sale of BankUnited on May 21, 2009. The successful acquisition group included a management team led by John Kanas, former chairman of North Fork Bancorp, and an ownership group comprised of WL Ross & Co., Carlyle Investment Management, Blackstone Capital Partners V, Centerbridge Capital Partners, LeFrak Organization, Inc., The Wellcome Trust, Greenaap Investments, and the East Rock Endowment Fund. However, the FDIC-run auction also attracted bids from two other groups. These two unsuccessful bidding groups were led by J.C. Flowers & Co. and Toronto Dominion Bank, respectively.
Rejection of "Higher" Bid Reveals FDIC Concerns
The FDIC’s rejection of the Toronto Dominion bid is not surprising as TD applied a much larger discount to the value of the failed bank’s assets than did the bids from J.C. Flowers and John Kanas, bidding as JAK Holdings, LLC. However, the FDIC’s rejection of the J.C. Flowers offer is interesting because that bid applied a smaller asset value discount and a larger deposit premium than did the successful JAK Holdings bid. A review of the bid forms and comments from parties familiar with the FDIC process suggests that the J.C. Flowers bid was rejected because regulators were concerned about how to evaluate future losses under the loss-share agreement to be entered into between the FDIC and the successful bidding group. A notation on J.C. Flowers’ bid form placed by the FDIC staff suggests that J.C. Flowers sought the ability to transfer – without FDIC approval – BankUnited assets subject to an ongoing FDIC loss-share obligation. The FDIC may be concerned about allowing future transfers of assets accompanied by the FDIC’s loss-sharing obligation to unknown parties because its estimated recovery value for the assets, one of the risks to the future health of the Deposit Insurance Fund and therefore an important factor in the statutory “least cost to the FDIC” test, is likely tied to the knowledge and experience of the party that controls and manages those assets.
Summary of the Newly Released Bid Forms
J.C. Flowers & Co. made a single bid for all of the deposits of the failed bank. The terms of this bid can be summarized as follows:
The J.C. Flowers bid form can be found at:
JAK Holdings LLC made two bids for all of the deposits of the failed bank. Multiple bids are "encouraged" by the FDIC with the understanding that the FDIC will select the bid that is "most cost effective" for the FDIC. The JAK bid forms show the following:
First JAK Bid:
Second JAK Bid:
The JAK Holdings LLC bid forms can be found at:
Toronto Dominion Bank, N.A. also made two bids for all of the deposits of the failed bank as follows:
First Toronto Dominion Bank Bid:
Second Toronto Dominion Bank Bid:
The TD Bank bid forms can be found at:
Significant FDIC Risk in Loss Sharing Agreements
The short term economic difference between the J.C. Flowers bid and the best of the two JAK Holdings bids is readily capable of estimation. JAK Holdings offered $205 million less for the bank’s assets. In addition, JAK Holdings offered no deposit premium to J.C. Flower’s 1% premium. Assuming deposits remained constant from the $8.6 billion in deposits reported by BankUnited as of May 2, 2009 through closing, the J.C. Flowers deposit premium was worth another $86 million. While almost certainly retail deposits would have deteriorated in the interim, the sum of these numbers suggests a delta of as much as $291 million. Opposing this is the additional risk to the FDIC’s Deposit Insurance Fund under the J.C. Flowers proposal to allow transfer of assets covered by the loss sharing agreement. The magnitude of this risk is illustrated by the loss sharing arrangement reached between the FDIC and the successful JAK Holdings consortium. The parties to that agreement agreed to share losses on $10.7 billion in assets.
While the FDIC is tasked with selecting the "best" offer for failed banks, and regularly certifies that the bid it selects offers the “least costly” resolution, the BankUnited bidding records illustrate that the actual process is less transparent and more complex than simply comparing asset discount rates and deposit premiums. In fact, the FDIC is clearly considering the level of risk it is taking on under the terms of the loss-sharing agreements it enters, which may require the FDIC to make future payments. Managing these future payments is particularly important in light of the fact that, according to Bloomberg L.P., the FDIC’s industry-funded DIF has dropped 64% to $13 billion from its peak at the start of last year’s second quarter.
FDIC Guidelines Expected
The FDIC is expected to issue guidance for private equity participation in purchasing failed institutions in the coming weeks.
 A notation made by the FDIC staff on the J.C. Flowers bid form states "This bid was contingent upon modifying paragraphs 6.2 of the Loss Sharing Agreements to allow certain transfers of loss-share assets." While this notation is ambiguous as to whether J.C. Flowers sought the right, without FDIC consent, to transfer the assets subject to loss sharing or rather to assign the loss-sharing obligation of the FDIC to a third party acquiror of those assets, we have concluded (assuming the reference to paragraph 6.2 is correct) that J.C. Flowers most likely sought the ability to assign, without FDIC consent, the FDIC’s obligations under the loss sharing agreement. Paragraph 6.2 of the standard form Shared-Loss Agreement provides, among other things, that the purchaser may not assign its rights under the loss sharing agreement to a third party without FDIC consent. One media source reported that J.C. Flowers wanted the ability to transfer ownership of BankUnited assets that would be covered by loss-share agreements without the FDIC’s approval and that the FDIC had concerns on that point because the FDIC assesses loss-share risk based on who controls the covered assets.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or any of the following:
Dhiya El-Saden – Los Angeles (213-229-7196, [email protected])
Kimble C. Cannon – Los Angeles (213-229-7084, [email protected])
Stewart L. McDowell – San Francisco (415-393-8322, [email protected])
Douglas D. Smith – San Francisco (415-393-8390, [email protected])
Howard B. Adler – Washington, D.C. (202- 955-8589, [email protected])
Christopher J. Bellini – Washington, D.C. (202-887-3693, [email protected])
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