Speed Saves Money, Quiets FDIC Critics

WASHINGTON -- The sale of Southeast Bank last week was a double-barreled success for federal regulators.

By making the sale to First Union Corp. before Southeast was technically insolvent, the Federal Deposit Insurance Corp. appears to have significantly reduced the eventual cost to its Bank Insurance Fund.

Criticism Is Preempted

At the same time, regulators disarmed Capitol Hill critics such as Rep. Henry Gonzalez, D-Tex., who has been urging them to close troubled banks more quickly.

Southeast Bank, with about $10 billion in assets, still had $950 million in capital and reserves when regulators seized it last Thursday. Southeast had borrowed $568 million from the Federal Reserve Bank of Atlanta and could not meet a Fed demand for immediate repayment, prompting its closure. Usually, banks are not seized until they are insolvent.

Rep. Gonzalez has been critical of the Fed for propping up weak banks with advances.

FDIC Chairman L. William Seidman acknowledged at a press conference that the regulators' early seizure of Southeast was prompted in part by the political pressure.

"One of the reasons that this bank is being resolved at an earlier date than we have been able to resolve others," the outgoing FDIC chief said, "is because of Chairman Gonzalez's initiative in dealing with Fed lending."

Mr. Gonzalez struck a deal with regulators this summer that limits the Federal Reserve's ability to prop up a undercapitalized banks through the discount window.

The compromise essentially bars the Fed from lending to a sick bank for more than 60 days in any four-month period. Southeast Bank was nearing that deadline.

Chairman's Arguments

Rep. Gonzalez argues long-term Fed lending gives uninsured depositors time to yank their funds and results in the further deterioration of the franchise.

"I think that got all of the regulators' attention," Harrison Young, FDIC's director of resolutions, said of Rep. Gonzalez's charges.

The relatively quick resolution of Southeast Bank meant its franchise was worth more to First Union. A source close to the deal said First Union told the FDIC it would clip $1 million off of its offer for each day that elapsed before Southeast's seizure. First Union ended up paying the FDIC a premium of $81 million.

And by closing the bank while it still had capital, the agency was able to use that money to offset the cost of the deal. The agency is predicting that its loss will be $350 million, a fraction of the cost of other big bank failures.

Besides the early intervention, the Southeast deal differed from past rescues in two key ways:

* First Union assumed all of Southeast's loans. In past deals, such as the Bank of New England, the FDIC yanked the bad loans from the failed bank and paid the acquirer to liquidate them. First Union, however, is assuming the loans and will work with borrowers on repayment.

"If you liquidate, you get less," explained one lawyer who worked on the deal. "This way, First Union gets the customer relationship, the income stream, and the government has fewer headaches."

* The FDIC convinced First Union to take 15% of any losses on a loan made by Southeast. In the past, the FDIC took all the risk in past bailouts.

Not a Panacea

"We'll try to do this sort of loss-sharing thing again," Mr. Young said. "It won't be possible to do in every circumstance."

Whether future buyers will bite depends largely on the particular market and the condition of the troubled bank's portfolio.

"First Union is betting that Florida has hit bottom and its loss won't be very big," explained one lawyer who worked on the deal. "But the FDIC couldn't have pulled it off in New England."

One of the other bidders, Barnett Banks Inc. of Jacksonville, Fla., offered less for Southeast because it believes the loss-sharing agreement will cost more than First Union is betting.

"I think our bid was driven on a more pessimistic view of the portfolio," the losing bidder explained.

PHOTO : Harrison Young Acknowledges being prodded

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