No matter how dire the situation when a bank fails, private investment firms can’t seem to get a nod for their salvage offers during U.S.-run auctions — leaving them to wonder if they’ll ever be allowed to win.
It’s not for lack of trying. More than a dozen nonbanks sought to play a role in the post-failure sales of Silicon Valley Bank and Signature Bank, according to postings by the Federal Deposit Insurance Corp. that disclosed all the bids received and the terms. The lists featured some of the biggest names in the private investment world, including units of Blackstone Inc., Sixth Street Partners and Apollo Global Management, and some firms that teamed up with banks on bids to improve their chances. None of them succeeded.
“We believe that the regulators prefer a bank bid over investment firms in almost every instance,” said David Moffitt, senior adviser at private equity firm Flexpoint Ford LLC. “We don’t expect that approach to change if and when there are additional bank failures.”
The postings could add fodder to debates about whether the FDIC is getting the best deals when it resolves failed banks, and whether it could be more solicitous to private firms rather than making big banks even bigger. The FDIC outlined the financial terms of the bids, some of them seeking to buy the banking operations; others were for just parts of the company or pools of assets. In some cases, details of the competing bids appeared to be inferior.
But the disclosure didn’t say which firms made which bids. Some of the connections have nonetheless been circulating. A sampling:
- Sixth Street Partners banded together with Fortress Investment Group and Oaktree Capital Management with an offer to buy parts of failed Silicon Valley Bank last month, according to people familiar with the matter. Combined with a separate proposal from Valley National Bancorp, the offers would have sold off the bank, without asking for any loss-sharing agreements or government-backed financing, the people said.
- A separate bid came from Blackstone, which agreed to back Valley National’s offer for the rest of SVB. But the bid was non-binding, FDIC officials said.
- Apollo also bid for some of SVB’s loan portfolio, according to the FDIC posting.
- When when First Republic Bank failed, Apollo teamed up with BlackRock Inc. and PNC Financial Services Group Inc. to take control, Bloomberg reported earlier.
Those bids didn’t measure up. Instead, First Citizens BancShares Inc. snagged SVB at a hefty $16.5 billion discount, along with a loss-sharing agreement, a credit line and cut-rate financing from the U.S. JPMorgan Chase & Co. won First Republic and got sweeteners that included 80 percent loss-sharing on most of the acquired loans for five to seven years and $50 billion of discounted U.S. financing. A unit of New York Community Bancorp grabbed Signature at a $2.4 billion discount.
Nonbanks come to the table at a disadvantage because they don’t have the charters that would allow them to buy a lender in its entirety. What’s more, the FDIC doesn’t regulate nonbanks, which complicates oversight. But in theory, they can put in bids in conjunction with an existing bank that could be deemed more attractive.
For its part, the FDIC is legally required to go with the deal that’s least expensive for its deposit insurance fund. In the case of SVB, regulators did consider various combinations of bids — but the First Citizen whole-bank option came out on top in terms of costs, according to FDIC officials, who spoke on the condition of not being identified. The Signature auction received no nonbank interest, the posting shows.
Equity Kickers
An added advantage: Publicly traded banks can offer equity-sharing that gives the FDIC’s insurance fund a boost worth hundreds of millions of dollars when their stocks rise. That wasn’t an option for some private equity firms.
The winning proposal by First Citizens included all the deposits as well as $72 billion of assets at a 23 percent discount with a loss-sharing agreement. First Citizens was among at least four bidders that sought to take over all deposits and more than $70 billion in assets, the FDIC posting shows. Among that group, it offered the lowest discount, but also was among the two that asked for a loss-sharing, which could end up costing the government more in the future.
This doesn’t mean the agency is categorically opposed to private firms, the officials said. While nonbanks aren’t technically eligible to enter into loss-sharing agreements and financing with the U.S. government, the FDIC could structure a joint venture or limited liability agreement that could get the nonbanks to the same place.
“As a practical matter, nonbanks haven’t had a real chance to actually compete against banks in the FDIC’s failed bank auctions,” said FDIC board member Jonathan McKernan, a Republican who has been critical of the auction process. “I can’t say for sure whether it would have made a difference, but it does raise a real question as to whether a better process would have resulted in a higher price for the assets or perhaps even a different winning bidder.”
For SVB, the Sixth Street-Fortress-Oaktree trio made a binding bid between 65 and 70 cents on the dollar on pools of loans with an outstanding amount of nearly $15 billion, the people said. While the Blackstone bid was attractive, the proposal included a clause that could have let the private equity giant out of the deal after it conducted due diligence, according to the FDIC officials.
Given the hasty nature of such sales, the ability to get a loss-sharing agreement from the FDIC gives banks an advantage in post-failure auctions; the backstop enables them to bid higher and more firmly. Some nonbanks wanted more time to kick the tires on the loans, since they weren’t given a safety net for future losses.
Rather than months to prepare for a sale as is the norm, the agency had mere days put together a process to attract buyers. The bank’s speedy demise led to a frenzied sale process that was first open only to banks to participate, according to the people.
Investment firms could have been able to participate by quickly purchasing a small bank as a vehicle for their bid or getting a shelf charter. But the FDIC then set a bar that buyers had to have at least $60 billion of assets, the people said. Doing the due diligence and getting approval for a bank of that size effectively nixed that option for nonbanks.
Asset Pools
The FDIC then opened up the sales process to nonbanks to purchase pools of assets, the people said. Those bids were considered along with banks that could take on the deposits, FDIC officials said.
Ultimately with SVB, the FDIC went with a bid that helped the nation’s 30th-largest bank as of Dec. 31 absorb an institution that had been the 16th-largest. First Republic went to a bank that already had the title of the biggest lender in the U.S., JPMorgan.
As things stand, the FDIC doesn’t have “great options” when it comes to selling collapsed lenders, according to Anat Admati, a Stanford business school professor and author of The Bankers’ New Clothes, who pointed out that the regulator has sold to “institutions that are are already too-big-to-fail.”
“But it isn’t clear that private equity and investment firms are well-suited to an industry that’s regulated and deposit-taking,” Admati added.
