By now, we know that even $700 billion in government money can't fix every problem that U. S. banks have. But after the Great Depression of the 1930s, the federal regulators promulgated a rule that only bank holding companies could operate banks. The rule was created to prevent future bank owners who found themselves in economic turmoil from taking resources from the bank and using them for other, non-bank ventures.
Lately, though, some investors have been allowed to operate by a different set of rules, and that has alarmed some legislators and market watchers.
This all came to light when the Office of Thrift Supervision (OTS) allowed a private equity firm to buy a majority stake in Flagstar Bancorp, Inc., the holding company for Flagstar Bank.
Based in Michigan, Flagstar had 177 banking centers in Michigan, Indiana, and Georgia at the end of March. It also operated 61 home loan centers in 18 states.
According to this article, this "unprecedented move" to allow the private equity deal put the OTS at odds with the Federal Reserve, whose rules "state that private equity firms cannot own a majority stake in a lender because they are not registered as a bank." The concern was that other private equity firms would try to follow suit.
Flagstar's case is interesting. It applied to participate in the Treasury Department's Troubled Asset Purchase Program, but was advised that getting the $266.7 million in government money it sought was contingent upon also getting a $250 million capital infusion from an affiliate of MatlinPatterson Global Advisers LLC. MatlinPatterson is based in New York and bills itself as a "global distressed private equity firm" (and - unless you have a log-in ID and password - that's about all that the company's web site wants to tell you).
The pieces fell into place, and on January 30, it was reported that Flagstar received $523 million in new capital, It got $266.7 million from the TARP Capital Purchase Program in exchange for preferred stock and warrants; $250 million came from the MatlinPatterson affiliate, MP Thrift; and $5.32 million came from Flagstar Chairman Thomas Hammond (bio. p. 39), President Mark Hammond and other members of management. Flagstar also announced that MatlinPatterson had agreed to raise another $100 million in equity during the first quarter of 2009.
In return for MatlinPatterson's $250 million, it reportedly got 250,000 shares of convertible preferred stock that it exchanged for 312.5 million shares of common stock at a conversion price of $0.80 per share. That gave MatlinPatterson an approximately 70 percent stake in Flagstar. The stake increased by the end of June, when Flagstar reported that MP Thrift had invested the additional $100 million in capital in exchange for more preferred stock that can be converted into common stock at a discount to the prevailing market price, which stood at 82 cents as of July 22. The same press release also said that the trust preferred securities Flagstar issued to MatlinPatterson will pay a dividend of 10 percent, mature on September 15, 2039 and are callable by Flagstar beginning in 2011.
A 10 percent dividend might be enough to turn Treasury Secretary Timothy Geithner green with envy. That's because that is twice the dividend rate that Flagstar must pay the Treasury Department on the preferred stock the government holds. According to this Fact Sheet published by the Michigan Banker's Association, "For the first five years, a CPP recipient must pay quarterly a 5 percent annual dividend to the Treasury on the capital. This must be paid before any other dividend may be paid to any other shareholder. After the first five years, the dividend increases to 9 percent annually."
Granted, MatlinPatterson has more at stake in Flagstar than the government does at this point, but one could argue that it benefited greatly from the Treasury Department aid.
Sen. Jack Reed (D-RI), who chairs the Senate Banking subcommittee on securities, insurance, and investments, took issue with the way the Flagstar deal occurred. According to this article, Reed sent a letter to Geithner, Federal Reserve Chairman Ben Bernanke, and others, and said: "These activities represent another, particularly dangerous, example of regulatory arbitrage whereby institutions and firms are shopping around a potentially risky activity until they find a regulator who will allow it." Reed advocates consolidating the regulators so that this version of "forum shopping" would not succeed.
The article reports that Reed's concerns paid off. It said, "The Federal Reserve has since indicated it won't approve similar deals and the FDIC, which oversaw the sale of BankUnited to buyout firms including WL Ross & Co. and Carlyle Group, said last week it will provide 'policy guidance' for private-equity firms looking to buy ailing banks after global losses from the credit crisis topped $1.4 trillion."
While it's fair for private equity firms like MatlinPatterson to expect a return on risky investments in struggling banks, kudos to Sen. Reed for pushing for a uniform set of rules that will govern the conditions under which they can make those investments.
published July 23, 2009, 0 Comments
Leave a comment