The Goldome Winners Got a 24-Karat Deal

The Federal Deposit Insurance Corp.'s May 31 seizure of Buffalo, N.Y.-based Goldome was the largest savings bank seizure ever. And it is already the focus of one the agency's biggest political controversies.

FDIC Chairman L. William Seidman said the transaction was "cost-effective" for the agency and good for Buffalo businesses. "There will be gains in efficiency that may make the cost of doing business in Buffalo lower," he said.

According to the KeyCorp, the lead partner in the winning joint bid, the FDIC undervalued Goldome's assets and turned over the franchise for, in effect, no premium.

But James L. Vardon, executive vice president and first financial officer of First Empire State Corp., KeyCorp's partner, said the bidding situation was "clearly competitive."

"We felt our bid was fairly priced and offers us the opportunity to earn reasonable returns commensurate with the risk associated with Goldome's considerably troubled loan portfolio," he said.

Harsh Criticism

The outgoing management of Goldome said it's balance sheet had improved dramatically in the the past two years and the resolution was premature. CEO Thomas A. Cooper, a former Bank of America executive, was still looking for friendly capital the day the FDIC takeover was announced.

Steve McLin, a partner in America First Financial Fund, the losing bidder, called KeyCorp and First Empire "slash-and-burn" bidders and said the bidding process was unfair. America First had intended to keep Goldome's management and branches intact.

Buffalo Mayor James Griffin complained: "I would have liked to have seen the regulators take a little more time."

$60 Million Ahead

Figures supplied by KeyCorp executives suggest that it and First Empire acquired $60 million more in assets and FDIC payments than the liabilities assumed.

Lee Irving, KeyCorp assistant vice president for finance, said $60 million was a reasonable estimate. He also said that Goldome's claimed profits were "based on nonrecurring gains from a series of one-time sales of assets," and that Goldome's was "clearly too deep in the hole to be saved."

To all of which Jim Hand, the senior examination specialist at the FDIC who handled the negotiations replied: "God knows."

And maybe, in addition to God, the winning bidders.

A Complex Transaction

Sorting out the competing claims takes detailed analysis. Two transactions must be analyzed:

* The transaction between the FDIC and the joint bidders.

* The transaction between KeyCorp and First Empire, to which KeyCorp simultaneously transferred a part of Goldome's assets and liabilities under a prearranged and preapproved purchase-and-assumption agreement.

KeyCorp/First Empire assumed $5 billion in deposit liabilities (of which 92.5% are core deposits) and $4.3 billion in other liabilities, including $2.9 billion in Federal Home Loan bank borrowings, for total liabilities of $9.3 billion.

KeyCorp/First Empire got loan and other assets with a book value of $9.3 billion, of which $2 billion consisted of cash. They also received $198 million in additional FDIC payments.

Market Value Is the Key

It appears that the FDIC and KeyCorp agreed for purposes of the negotiations that Goldome's assets had a market value of slightly less than $9.1 billion. Loan assets that become classified as nonperforming during the next three years may be "put back," or returned to the FDIC.

The key to the deal is the real market value of the assets, not the agreed estimate. If, as KeyCorp executives believe - but only God knows for sure - the actual market value of Goldome's assets exceeds $9.2 billion, then KeyCorp/First Empire got a windfall, taking more in the combination of FDIC payments and market value assets than they assumed in liabilities.

In any case, the put-back provision assures that KeyCorp/First Empire can't lose. The partners will shed risky assets as soon as possible and put losses back to the FDIC.

In the purchase-and-assumption agreement between the joint bidders, First Empire got 14 of the 45 branches, $2.1 billion in deposit liabilities, $2.1 billion in book assets, and a $40 million cash payment from the FDIC.

In addition, First Empire received a $210 million cash payment from KeyCorp as a compensating payment after marking assets to market. KeyCorp and First Empire have agreed to recompute the balance sheet between them as the real market value of the assets purchased becomes clearer; and to split the windfall, if any, 60-40 in favor of KeyCorp.

A Successful Partnership

Goldome was the second consecutive successful joint bid by KeyCorp and First Empire. Last September they bought the western New York assets of Empire Federal Savings Bank from the Resolution Trust Corp.

The KeyCorp/First Empire joint bid innovation has changed the way both the RTC and the FDIC consider bids, making the parceling of banks more economical to the government while attracting more bidders.

Herb Held, the RTC's assistant director of resolutions, said that joint bids are "the most practical way" for midsize bidders to acquire assets.

The western New York branches of Empire and Goldome will probably prove especially lucrative for the acquirers. That is partly because because for two years before the resolutions both failed banks had slashed costs, retreated into such traditional businesses as home mortgages, and sold nonbanking assets to stem losses.

Empire, incorporated in Buffalo in 1854 as the Erie County Savings Bank, was the epitome of cautious local banking until the 1980s. Before the final resolution, it had eliminated over 550 jobs - 13% of its employees.

"There has been a learning curve" in structuring the joint bids, said William H. Dougherty, Keycorp's chief financial officer. KeyCorp and First Empire now have it down to a science.

"Loan quality review and loan pricing" are the most crucial considerations, Mr. Dougherty said. "You need people who know the local market and you need to get enough people working to do the job of marking up to market accurately." After the Empire acquisition, KeyCorp and First Empire significantly expanded the loan review teams for Goldome.

It is also important to recruit help from law and accounting firms, Mr. Dougherty said, especially with the tax implications of mortgage loan acquisitions. (In its latest deal, KeyCorp acquired Goldome's $14 billion mortgage unit. This, when combined with the KeyCorp's existing mortgage subsidiary, will make the company the ninth-largest mortgage banking concern.)

It is vital to ask the right questions during due diligence. KeyCorp and First Empire, using checklists developed during and after the Empire acquisition, did separate reviews. Then the two teams met for "fine-tuning."

KeyCorp and First Empire have also developed an "extensive, scientific methodology" for estimating operating cost reductions and, in particular, branch closings, Mr. Dougherty said.

But KeyCorp representatives noted that 85% of former Empire employees are still working for either the acquiring banks or the RTC. The KeyCorp people predicted similar results at Goldome. Though local newspapers cited fears of "devastating ... extensive layoffs," KeyCorp representatives predicted that the planned consolidation of mortgage servicing operations in Buffalo would add local jobs.

Of course during the negotiations KeyCorp and First Empire had no interest in telling the FDIC just how good Goldome's assets looked. In fact, according to the FDIC's Mr. Hand, the companies told the agency that the assets were not worth much.

Mr. Hand pointed out that the FDIC depended on the competitive bidding process. "There's only one number - the bid," he said, and the FDIC is required to pick the highest one.

KeyCorp's Mr. Dougherty agreed. Bidders can't be "too greedy," he said, because they want "to be sure to win."

And Mr. Vardon of First Empire State called the price "fair" - no windfall.

In retrospect, much of the criticism of the FDIC's handling of the Goldome sale seems unfair. The agency did as well for the government as possible - and the winning bidders did as well for their businesses as possible. But the advantage in this environment and in this transaction is with the bidders.

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