Twenty-two banks have failed so far in 2008. After Indymac failed in July, which was the largest of the year at that time, the FDIC saw that their reserves for taking over failing banks were going to disappear in a hurry. So they started acting as investment bank of sorts by brokering deals where they’d take some responsibility for bad assets of failed banks in exchange for pairing them with an acquirer at a fair price. When WAMU failed in September, it was the biggest bank failure of all time, but what the FDIC did was take over WAMU for a few days and brokered a sale to JP Morgan Chase. In what could have been a otherwise catastrophic situation, all players benefited.
The same thing happened shortly after the FDIC brought in Citibank as acquirer of Wachovia, which was on the verge of being seized. But not long after, Wells won Wachovia and took them over with no FDIC involvement. Another catastrophe averted in a strategy started by the FDIC. Now that this model has gained credibility, the FDIC is going one step further and saying that qualified non-financial firms can make bids for failed banks that they are going to or have already seized. Full press release below.
The FDIC is establishing a modified bidder qualification process to expand the pool of qualified bidders for the deposits and assets of failing depository institutions. The process will allow interested parties that do not currently have a bank charter to participate in the bid process through which failing depository institutions are resolved.
The FDIC is responsible for ensuring that failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund and minimal disruption to the financial system. In order to achieve this result, the FDIC markets the deposits and assets of a failing institution to known, qualified, and interested potential bidders. The FDIC recognizes that investors not organized as an FDIC insured depository institution or holding company may potentially be interested in bidding to purchase a failing institution.
In light of the time constraints involved with these types of transactions and consistent with the FDIC’s Statement of Policy on Applications for Deposit Insurance, the FDIC may apply modified deposit insurance application processes. The FDIC will consider abbreviated information submissions and applications, and may issue conditional approval for Deposit Insurance, in order to qualify interested parties for the FDIC’s failing institution bidders list. Investors that are interested in acquiring the deposits of failing institutions must have conditional approval for a charter from the responsible agency and meet the bid criteria established by the FDIC. In certain cases it would also be necessary to obtain conditional approval to establish a bank or thrift holding company. Federal and State agencies are coordinating on specific information needs and timing requirements and ultimately the granting of a charter and Deposit Insurance.
The basic areas of consideration would include a business plan compliant with the Community Reinvestment Act, readily available capital, and an identified management team subject to financial and biographical review.