Snark Attack

A banker friend uttered the obscene phrase "open bank assistance" the other day and wondered why investors with as much "pull" as Carl Icahn and Robert Rowling have apparently not been able to "pull off" a rare open bank assisted deal with the FDIC to rescue Guaranty Bank, which as of today, appears to be headed for a FDIC receivership and an assisted sale to Blackstone, Gerald Ford (who's got a shelf charter for a national bank and has been looking for a deal) or US Bank. Of course, Blackstone and Ford could still run aground on the shoals of the FDIC's recent non-starter of a proposal on restrictions on private equity investors in failed bank deals, but whoever buys the remnants of Guaranty Federal, the open bank assistance deal it proposed appears to be DOA.

There are a number of reasons for the failure, but one of them that shouldn't be overlooked is that there's usually not enough potential upside to offset the potential downside in an open bank assisted transaction where the bank is other than "too big to fail." Even If the proposal costs out as the least costly alternative, there is a good chance that the FDIC will be criticized whether the bank later tanks or whether it prospers. In the former case, the FDIC is criticized for throwing good money after bad and increasing the ultimate loss to the fund, and in the latter case, the FDIC is subject to criticism that it used its funds to make "private speculators rich." It reminds us of the old adage about the forward pass in football: there are only three things that can happen and two of them are bad (the pass is incomplete or it's intercepted). With open bank assistance, the only "good thing" that can happen is for the bank to survive and prosper, but not for a long time or not to the extent that anyone notices. If it either succeeds and someone notices or it fails and the assistance is "wasted," the FDIC takes it on the chin. From a political perspective, it's easier to let the bank fail, then deal with the remnants. God forbid private investors should lower the cost to the insurance fund in return for actually making a profit on the capital they put at risk.

Of course, letting the bank fail carries its own risks of second-guessing. The latest Inspector General's criticism of the FDIC over the failure of a small Georgia bank (paid subscription required) is typical and might have been written with crayon on a piece of construction paper by a first grader, the formula is so pat.

The Office of Inspector General for the Federal Deposit Insurance Corp. said in a report that the agency's supervision of Haven Trust Bank was "not effective in identifying and addressing problems early enough."

"By the time supervisory actions were taken against the bank, failure was all but inevitable," the IG's office said in the report. Haven Trust failed last December.

[...]

"Bank management engaged in a number of improper practices, including renewing loans that were experiencing problems and originating loans that appeared to be for the benefit of insiders and related parties," the report said.

The FDIC, the report said, should have been more aggressive in addressing the bank's use of interest reserves, "questionable loan participation practices," and conducted a better analysis of Haven Trust's allowance for loan and lease losses.

It's Washington, D.C. and there's always someone with an axe to grind looking over your shoulder, waiting for you to slip up so they can stick it to you. That town might as well be one giant gaggle of malpractice plaintiffs' lawyers.