Bidders Cool To U.S. Plan For Sale of Miami Bank
WASHINGTON - Federal regulators have run into significant roadblocks in their effort to arrange a quick sale of Miami-based Southeast Banking Corp., according to people familiar with the matter.
Regulators are actively pushing for a sale under a new policy that aims to reduce the cost of bailouts by finding merger partners for troubled banks before they become insolvent.
First Union Opts Out
But First Union Corp., viewed as a leading candidate to acquire Southeast, has told regulators it is not interested in the novel approach, according to a source close to the Charlotte, N.C.-based company.
And while regulators privately have not ruled out the possibility that a so-called "early resolution" deal might yet be pulled off, legal and timing obstacles are making that increasingly unlikely, sources said.
That would leave ailing Southeast with two options: work itself out of trouble with a privately arranged acquisition or capital infusion, or face seizure if losses further erode capital.
Officials at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. declined to comment on any effort involving Southeast.
A spokeswoman for Southeast, pointing out that a company must formally request early resolution, said: "I don't think it is a foregone conclusion that Southeast Bank will or will not ask for this kind of assistance."
For regulators, seizure of a large bank without a prearranged sale - as happened with Bank of New England last January - is the worst possible scenario. The franchise's value would immediately drop, raising the cost to the FDIC's already strapped deposit insurance fund.
FDIC Chairman L. William Seidman is convinced that the best way to reduce bailout costs is to find a merger partner for a troubled bank while its franchise is intact and the institution has capital.
Southeast Weighs Aided Deal
Southeast, whose heavy losses on real estate loans have eaten into its equity, is one of the policy's first test cases. The company is still solvent and could conceivably work its way out of trouble. But its margin for error after seven straight quarterly losses has become exceedingly slim.
The company has said it is considering the possibility of an acquisition that would involve federal aid.
But regulators trying to work out such a deal behind the scenes are finding it extremely complex. Unlike a seizure - in which a bank is closed, management is usually ousted, and shareholders are wiped out - open-bank assistance requires the agreement of all parties involved.
Furthermore, potential acquirers are worried that such a deal would be exceedingly risky.
"No one will buy Southeast without a closing," said a source representing a potential acquirer. "There are too many contingent liabilities."
After a bank is closed by regulators, a buyer is rid of creditor claims, lease obligations, and outstanding lawsuits.
In previous versions of open-bank deals, the FDIC has filled the negative-net-worth hole and left the new owner responsible for additional losses.
But regulators realize that, for an open-bank deal to be done today, the FDIC must share in future losses on the failing bank's portfolio. This "stop-loss" guarantee, as Office of Thrift Supervision Director T. Timothy Ryan Jr. calls it, raises another problem.
The FDIC is required by law to take the least costly route to resolving troubled banks. If the amount of money the FDIC must kick in is open-ended, that makes the deal tougher to value.
Selling a bank that still has capital also requires the government to compensate shareholders and debtholders or else risk being sued for seizing private property.
The FDIC is considering offering owners "imploding preferred" stock, according to people who are working with the agency on the idea.
For example, if an institution had $200 million in equity remaining, the shareholders' stake would be wiped out, but they would be given $200 million in preferred stock either the new institution or the acquiring bank. But the stock may "implode" as losses from the failed bank's portfolio are recognized.
A Conversion Option
After a certain period, if losses have not exceeded residual equity, the original shareholders may convert their preferred to common stock.
Assuming the FDIC could work out an open-bank rescue, to avoid cries that the agency gave a bank away without a competitive bid, the deal also would have to be shopped to other potential acquirers.
"These deals are immensely complicated; that's why they're not getting done," explained one frustrated private-sector participant in the Southeast effort.
In addition to First Union, potential acquirers of Southeast include Bank America Corp., Barnett Banks Inc., and NCNB Corp.