Posts Tagged ‘Failed banks’

What It Takes for the FDIC SPOE Resolution Proposal to Work

Editor’s Note: The following post comes to us from Karen Petrou, co-founder and managing partner of Federal Financial Analytics, Inc., and is based on a letter and a FedFin white paper submitted to the FDIC by Ms. Petrou; the full texts are available here.

In a comment letter and supporting paper to the FDIC on its single-point-of-entry (SPOE) resolution concept release, Karen Shaw Petrou, managing partner of Federal Financial Analytics, argues that SPOE is conceptually sound and statutorily robust. However, progress to date on orderly liquidation has been so cautious as to cloud the credibility of assertions that the largest U.S. financial institutions, especially the biggest banks, are no longer too big to fail (“TBTF”). Crafting a new resolution regime is of course a complex undertaking that benefits from as much consensus as possible. However, if definitive action is not quickly taken on a policy construct for single-point-of-entry resolutions resolving high-level questions about its practicality and functionality under stress, markets will revert to TBTF expectations that renew market distortions, place undue competitive pressure on small firms, and stoke systemic risk. Even more dangerous, the FDIC may not be ready when systemic risk strikes again.

Questions addressed in detail in the paper and Ms. Petrou’s answers to them are summarized below:

…continue reading: What It Takes for the FDIC SPOE Resolution Proposal to Work

FDIC Lawsuits against Directors and Officers of Failed Financial Institutions

Editor’s Note: John Gould is senior vice president at Cornerstone Research. The following post discusses a Cornerstone Research report by Abe Chernin, Katie Galley, Yesim C. Richardson, and Joseph T. Schertler, titled “Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014,” available here.

Federal Deposit Insurance Corporation (FDIC) litigation activity associated with failed financial institutions increased significantly in 2013, according to Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014, a new report by Cornerstone Research. The FDIC filed 40 director and officer (D&O) lawsuits in 2013, compared with 26 in 2012, a 54 percent increase.

The surge in FDIC D&O lawsuits stems from the high number of financial institution failures in 2009 and 2010. Of the 140 financial institutions that failed in 2009, the directors and officers of 64 (or 46 percent) either have been the subject of an FDIC lawsuit or settled claims with the FDIC prior to the filing of a lawsuit. Of the 157 institutions that failed in 2010, 53 (or 34 percent) have either been the subject of a lawsuit or have settled with the FDIC.

…continue reading: FDIC Lawsuits against Directors and Officers of Failed Financial Institutions

“SPOE” Resolution Strategy for SIFIs under Dodd-Frank

Editor’s Note: H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell publication by Mr. Cohen, Rebecca J. Simmons, Mark J. Welshimer, and Stephen T. Milligan.

On December 10, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) proposed for public comment a notice (the “Notice”) describing its “Single Point of Entry” (“SPOE”) strategy for resolving systemically important financial institutions (“SIFIs”) in default or in danger of default under the orderly liquidation authority granted by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). [1] The Notice follows the FDIC’s endorsement of the SPOE model in its joint paper issued with the Bank of England last year.

…continue reading: “SPOE” Resolution Strategy for SIFIs under Dodd-Frank

Characteristics of FDIC Lawsuits against Directors and Officers

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday January 17, 2013 at 9:06 am
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Editor’s Note: The following post comes to us from Katie Galley, senior vice president at Cornerstone Research. This post is based on a Cornerstone Research publication by Ms. Galley, Abe Chernin, Yesim C. Richardson, and Joseph T. Schertler.

This is the fourth in a series of reports that analyzes the characteristics of professional liability lawsuits filed by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of failed financial institutions. Lawsuits may also be filed by the FDIC against other related parties, such as accounting firms, law firms, appraisal firms, or mortgage brokers, but we generally do not address such lawsuits here.

Overview of Litigation Activity

FDIC litigation against directors and officers (D&O) of failed financial institutions has increased markedly in the fourth quarter of 2012, after a lull during the second and third quarters. In October, November, and through December 7, the FDIC filed nine new lawsuits against directors and officers of failed institutions. If additional lawsuits are filed in the last few weeks of December, the number of filings in the fourth quarter will be higher than in the first quarter, when nine lawsuits were filed. Twenty-three lawsuits have been filed to date in 2012. If the recent pace of new filings persists for the balance of 2012, we expect 26 lawsuits will be filed by the end of the year. This reflects an increased level of filing activity compared with 16 in 2011 and two in 2010. In total, 41 lawsuits have been filed since 2010 against the directors and officers of 40 institutions (two separate lawsuits have been filed against various IndyMac directors and officers).

…continue reading: Characteristics of FDIC Lawsuits against Directors and Officers

FDIC Lawsuits Targeting Failed Financial Institutions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday April 30, 2012 at 9:46 am
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Editor’s Note: The following post comes to us from Narayanan Subramanian, principal at Cornerstone Research. This post is based on a Cornerstone Research publication by Katie Galley and Joe Schertler, available here.

As widely reported in the press, seizures of banks and thrifts by regulatory authorities began to subside in 2011. Throughout the year, 92 institutions were seized compared with 157 in 2010 and 140 in 2009. In contrast, Federal Deposit Insurance Corporation professional liability lawsuits targeting failed financial institutions began to increase in 2011. These are lawsuits in which the FDIC, as receiver for failed financial institutions, brings professional liability claims against directors and officers of those institutions and against other related parties, such as accounting firms, law firms, appraisal firms, or mortgage brokers.

Overview

From July 2, 2010, through January 27, 2012, the FDIC filed 21 lawsuits related to 20 failed institutions (two of the 21 lawsuits were associated with IndyMac Bank, F.S.B). Of the 21 lawsuits, two were filed in 2010, 16 in 2011, and three in January 2012. Aggregate damages claimed in the complaints totaled $1.98 billion.

…continue reading: FDIC Lawsuits Targeting Failed Financial Institutions

The Vickers Report and the Future of UK Banking

Posted by Barnabas Reynolds, Shearman & Sterling, on Thursday March 29, 2012 at 9:14 am
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Editor’s Note: Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication; the full publication, including footnotes, is available here.

The final report of the UK’s Independent Commission on Banking, chaired by Sir John Vickers, was published on 12 September 2011. Its recommendations include ring-fencing UK banks’ retail banking operations, higher capital requirements for UK retail banks, preferential status for insured deposits in a bank insolvency and measures to increase competition in the UK banking sector. The UK government issued its formal response on 19 December 2011 and has indicated it will implement most of the recommendations. This memorandum summarises the key recommendations and their likely impact, in light of the UK government’s response.

Introduction

The Independent Commission on Banking (the “Vickers Commission”) was set up by the UK government to make recommendations for the reform of the UK banking sector, with a view to reducing systemic risk, mitigating moral hazard and reducing the likelihood and impact of firm failures. The Vickers Commission was also asked to consider competition in the UK banking sector.

…continue reading: The Vickers Report and the Future of UK Banking

FDIC and Private Capital: Moving the Goal Lines

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on Thursday January 28, 2010 at 9:12 am
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Editor’s Note: Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by John Douglas, Luigi De Ghenghi, Arthur Long and William Taylor.

For the second time since adopting its Final Statement of Policy for Failed Bank Acquisitions (the “Policy Statement”), the FDIC has issued “Questions and Answers” (the “Revised Q&As”) about the Policy Statement that appear to make it more difficult for private investors to avoid the onerous standards and requirements of the Policy Statement. [1] The FDIC will now presume that, if more than two-thirds of the total voting stock of an insured depository institution or its holding company that acquires a failed bank or thrift is held by private investors that each own 5% or less of the voting stock, the private investors are acting in concert as a single investor group. The private investors will be subject to the requirements of the Policy Statement unless they can satisfy the FDIC that the presumption has been rebutted. This position seems to confirm the FDIC’s preference for transactions in which an existing bank holding company owns at least two-thirds of the voting stock of the acquiring depository institution or its holding company or is itself the acquirer (with new private investors limited to no more than one-third of the existing bank holding company’s total equity).

…continue reading: FDIC and Private Capital: Moving the Goal Lines

FDIC Releases Policy Statement Restricting Private Equity Investments in Failed Banks

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on Friday August 28, 2009 at 9:56 am
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(Editor’s Note:  This post is based on a Wachtell, Lipton, Rosen & Katz client memorandum prepared by Edward D. Herlihy, Richard K. Kim, Lawrence S. Makow, Nicholas G. Demmo and Matthew M. Guest.)

The FDIC issued yesterday its final policy statement on private equity investments in failed banks. In early July, the FDIC issued a proposed policy statement containing stringent restrictions on these types of transactions. While the final policy statement relaxes some of these limitations, it continues to impose significantly higher requirements for private equity investors seeking to acquire failed banks than for strategic acquirors.

Scope. Although the FDIC’s policy is generally viewed as focused on private equity investments, the policy is worded more broadly and applies to “private investors” – a term which is not defined in the policy. The earlier proposal applied to “private capital investors” and contained language, which has since been omitted, that made it clearer that the focus was private equity investors. In contrast, the policy statement does not apply to, and in fact encourages investment structures where private equity investors acquire a failed bank in conjunction with a bank or thrift holding company with a successful track record where the bank/thrift holding company has a strong majority interest in the resulting bank or thrift.

Capital Support. Investors will be required to commit that an acquired depository institution be capitalized at a minimum 10% Tier 1 common equity ratio for at least three years following acquisition. The FDIC had previously proposed a minimum 15% Tier 1 leverage ratio – a higher number but a different measurement. The Tier 1 common equity ratio was a key measurement for the recent stress tests conducted by the Federal Reserve on the largest U.S. banks, but before then was not typically used as an explicit measure of regulatory capital. (In order to pass the stress test, banks were required to have sufficient common equity to achieve a Tier 1 common equity ratio of at least 4% at year-end 2010 under a hypothetical economic scenario.) Under the FDIC’s final rules, failure to meet the 10% Tier 1 common equity ratio would result in the institution being treated as “undercapitalized” for purposes of Prompt Corrective Action. This designation triggers strong regulatory measures, such as a requirement that the institution file a capital plan, restrict the payment of dividends and restrict asset growth.

Source of Strength. Previously, the FDIC had proposed that investment vehicles would be expected to serve as a source of strength for their subsidiary depository institutions and would be expected to sell equity or engage in capital qualifying borrowings as necessary. The final policy does not contain this requirement.

Cross Support of Affiliated Institutions. Investors and investor groups whose investments constitute 80% or more of the investments in more than one depository institution must pledge to the FDIC their proportionate interests in each such institution to pay for any losses to the Deposit Insurance Fund resulting from the failure of, or FDIC assistance provided to, the other affiliated institutions.

Minimum Holding Period. Investors are prohibited from selling or otherwise transferring securities of the investors’ holding company or depository institution for a three-year period following the acquisition, unless the FDIC has approved the sale or transfer.

Bar on Affiliate Transactions. All extensions of credit to investors, their investment funds, and any of their affiliates, by a depository institution acquired from receivership are prohibited.

Bank Secrecy Law Jurisdictions. Investment structures involving entities domiciled in bank secrecy jurisdictions would not generally be eligible to own an interest in a depository institution acquired from receivership, unless they are subsidiaries of companies located in countries that exercise comprehensive consolidated supervision as recognized by the Federal Reserve and commit to provide extensive information to the FDIC.

Ability of Existing Investors to Bid on a Failed Depository Institution. Investors that hold 10% or more of the equity of a depository institution that fails would not be eligible to bid on the institution once it is in receivership.

Extensive Disclosure. Investors would be expected to submit to the FDIC detailed information about themselves, all entities in the proposed ownership chain, the size of the capital fund or funds, their diversification, the return profile, the marketing documents, the management team and the business model.

Private equity investors already face significant regulatory obstacles in bidding on failed banks. Since becoming a bank or thrift holding company and submitting to consolidated regulatory supervision is not practical for most private equity investors, investors need to satisfy the Federal Reserve (in the case of bank acquisitions) and the Office of Thrift Supervision (in the case of thrift acquisitions) that they will restrict themselves to largely passive roles. At the same time, they strive to ensure the placement and maintenance of competent management with the wherewithal to engineer a turnaround. There remain powerful arguments for the banking system to tap the investment resources available to private equity. Whether the FDIC’s final policy has changed enough to permit private equity to participate in acquiring failed banks remains to be seen.

FDIC Proposal May Inhibit Private Equity Investments in Failed Banks

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on Sunday July 12, 2009 at 2:40 pm
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The FDIC recently issued a proposed policy statement laying down stringent new ground rules for private equity investments in failed banks. Currently, private equity firms face significant regulatory challenges in structuring investments in banks and thrifts. The Federal Reserve (in the case of bank acquisitions) and the OTS (in the case of thrift acquisitions) remain the principal regulators determining capital, governance and control considerations relating to permissible bank/thrift acquisition structures. However, the FDIC’s proposed policy statement would impose meaningful additional capital and related qualifying considerations in order for a private equity sponsored vehicle to acquire a failed bank being sold by the FDIC.

The proposed policy statement appears to be primarily focused on structures used to acquire failed banks involving multiple investors – typically private equity funds – where no investor would be deemed to control the bank going forward for regulatory purposes. By doing so, the investors minimize the amount of regulation to which they would be subject. Structures along these lines were used to acquire both Indymac and BankUnited. The proposed policy statement would impose a number of new restrictions on these types of structures and are summarized below:

Capital Support. Investors would be expected to commit that an acquired depository institution be initially capitalized at a minimum 15% Tier 1 leverage ratio for at least three years – nearly four times the minimum ratio to be deemed adequately capitalized. Failure to meet this capital minimum would result in the institution being treated as “undercapitalized” for purposes of Prompt Corrective Action, triggering harsh regulatory measures, such as a requirement that the institution file a capital plan, restrict the payment of dividends and restrict asset growth.

Source of Strength. Investment vehicles would be expected to serve as a source of strength for their subsidiary depository institutions and would be expected to sell equity or engage in capital qualifying borrowings as necessary.

Cross Guarantee of Affiliated Institutions. Investors and investor groups whose investments constitute a majority of the investments in more than one depository institution would be expected to pledge to the FDIC their proportionate interests in each such institution to pay for any losses to the Deposit Insurance Fund resulting from the failure of, or FDIC assistance provided to, the other affiliated institutions.

…continue reading: FDIC Proposal May Inhibit Private Equity Investments in Failed Banks

Toxic Tests

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulation on Monday June 29, 2009 at 4:35 am
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Editor’s Note: This post is Lucian Bebchuk’s current column in his series of monthly commentaries titled “The Rules of the Game” for the international association of newpapers Project Syndicate. The series focuses on finance and corporate governance and may be accessed here. Below is the text of Professor Bebchuk’s column:

The United States government is now permitting ten of America’s biggest banks to repay about $70 billion of the capital injected into them last fall. This decision followed the banks having passed the so-called “stress tests” of their financial viability, which the US Treasury demanded, and the success of some of them in raising the additional capital that the tests suggested they needed.

Many people have inferred from this sequence of events that US banks – which are critical to both the American and world economies – are now out of trouble. But that inference is seriously mistaken.

In fact, the US stress tests didn’t attempt to estimate the losses that banks have suffered on many of the “toxic assets” that have been at the heart of the financial crisis. Nevertheless, the US model is catching on. In a meeting this month, finance ministers of G-8 countries agreed to follow the US and perform stress tests on their banks. But, if the results of such tests are to be reliable, they should avoid the US tests’ fundamental flaw.

Until recently, much of the US government’s focus has been on the toxic assets clogging banks’ balance sheets. Although accounting rules often permit banks to price these assets at face value, it is generally believed that the fundamental value of many toxic assets has fallen significantly below face value. The Obama administration came out with a plan to spend up to $1 trillion dollars to buy banks’ toxic assets, but the plan has been put on hold.

It might have been hoped that the bank supervisors who stress-tested the banks would try to estimate the size of the banks’ losses on toxic assets. Instead, supervisors estimated only losses that banks can be expected to incur on loans (and other assets) that will come to maturity by the end of 2010. They chose to ignore any losses that banks will suffer on loans that will mature after 2010. Thus, the tests did not take into account a big part of the economic damage that the crisis imposed on banks.

…continue reading: Toxic Tests

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