The FDIC Can't Blame This One On Danny Wall
WASHINGTON -- If former S&L czar M. Danny Wall had bungled the bailout of Goldome as badly as the Federal Deposit Insurance Corp. did, Congress would be raising hell.
But thanks to the FDIC's magical reputation, not a single eyebrow on Capitol Hill has been raised over the decade-long blunder, which will cost the Bank Insurance Fund at least $1.5 billion - not the $930 million that the FDIC cited in its press release last month.
If ever a flashing red light warned of the downside of forbearance, this is it.
Back in 1982, former FDIC Chairman William Isaac decided to save dough by selling some brain-dead savings banks rather than liquidate them. The buyer was Goldome, then a healthy savings bank based in Buffalo. It ended up tripling its assets in the deal.
A Torrent of Red Ink
As an incentive, the FDIC promised to make up any losses from the troubled institutions - provided Goldome would share any profit.
But the red ink never stopped flowing, and the guarantees cost the FDIC $720 million through last month, when Goldome failed.
On top of that, closing the bank will cost $930 million to $1 billion, depending on how much some assets fetch.
Why didn't L. William Seidman, who came aboard as FDIC chairman in 1985, try to get out of the arrangement? His spokesman, Alan Whitney, claimed that the contract was ironclad. (Ask any Indian or S&L owner about the inviolability of government contracts, and you get a different story.)
Good for Investors
The deal the FDIC cut with First Empire State Corp. and KeyCorp - which bought Goldome's remains - isn't anything to crow about either, unless you're one of the investors.
For them, it looks like the sweetest opportunity since Mr. Wall's 1988 blue-plate specials were wolfed down by shrewd investors like Robert Bass and Ronald Perelman.
The difference this time is that the FDIC solicited competitive bids. Mr. Wall sold S&Ls one at a time, haggling with the buyers as if they were shopping for used cars. Thus Mr. Seidman can blame the marketplace and not his agency's negotiating skills, or lack thereof, for the low price.
The millionaire who profited from a desperate Uncle Sam this time was investment genius Warren Buffett, chairman of Berkshire Hathaway.
Buffett Was Eager
When First Empire chairman Robert Wilmers told him that First Empire intended to bid for Goldome but lacked enough cash, Mr. Buffett anted up $40 million, buying 40,000 shares of preferred stock that can be converted into common shares at $79.
First Empire's common stock is now trading around $87 a share, so Mr. Buffett has already made about $4 million on paper - a 10% return in just under four months. Not bad.
But KeyCorp's stockholders did even better, despite the fact the company diluted their stake in mid-March by issuing 4.6 million new shares at $27.75 each. Now, the stock is trading around $35, up 21% in three months.
The stock action is a pretty good indication that the FDIC let Goldome's assets go at a bargain-basement price.
Dominating Buffalo Market
KeyCorp invested $90 million in new capital for the deal; First Empire, $45 million. And what they came away with was dominance in the Buffalo market, which is more midwestern than northeastern in orientation and has escaped the ravages of the regional recession. (Goldome had invested heavily outside the area and reaped the sorry rewards.)
By most estimates, the buyers will reduce their annual expenses by a total of about $100 million, starting from day one.
They are laying off hundreds of Goldome employees and don't have to pay any severance.
First Empire, with 34.6% of the deposits, and KeyCorp, with 20%, are now ranked No. 1 and No. 2 in the Buffalo area.
Millions More Available
Some analysts estimate they'll save millions of dollars more by shaving rates on their deposits, though officers of the banks maintain that the market is still too competitive to get away with such a heavy-handed move.
And the banks will split about $60 million in fees from the FDIC for managing bad assets from Goldome.
Was it a no-brainer?
No way, said Gary Paul, First Empire's vice president of finance.
Potentially Nasty Haircut
The companies can return troubled assets to the FDIC for three years but only if the loans are classified by the regulators. If the credits don't go bad within that period, the companies could take a nasty little haircut.
Now, when First Empire bought a troubled S&L from Mr. Seidman's Resolution Trust Corp. last year, that was a nobrainer: "We could put back all the loans to the RTC we wanted," said Mr. Paul.