How the FDIC Rigged the SVB Auction The agency snubbed nonbank bidders, which cost taxpayers more. By The Editorial Board April 18, 2023 6:59 pm ET 79 Federal Deposit Insurance Corporation Chairman Martin Gruenberg testifies before a Senate Banking, Housing, and Urban Affairs hearings to examine recent bank failures and the Federal regulatory response on March 28. Photo: Manuel Balce Ceneta/Associated Press It was always hard to credit the Biden Administration’s claims that political bias played no role in its handling of the Silicon Valley Bank failure. Now we’ve learned from banking sources that the Federal Deposit Insurance Corp. snubbed nonbanks interested in buying SVB, resulting in increased costs to the insurance fund. FDIC Chairman Martin Gruenberg told Congress last month that the agency received a valid bid to acquire SVB the weekend after it failed on Friday, March 10. But he said the bid didn’t meet the FDIC’s statutory requirement to minimize costs to the deposit insurance fund because losses on SVB’s insured deposits were likely to be very small. The bid, he added, “was more expensive than a liquidation” would have been. Yet, lo, on March 12 the FDIC invoked a “systemic risk” exception to its least-cost resolution requirement and guaranteed SVB’s uninsured deposits. This made SVB more attractive to potential suitors but at the price of increasing the FDIC’s liability. While the FDIC initially limited its auction to banks, it later sought to expand the pool of bidders to nonbanks such as asset managers and private-equity firms. But even then, the FDIC placed nonbanks on an unequal playing field. Advertisement - Scroll to Continue The FDIC offered banks—but not nonbanks—a loss-share arrangement in which the agency agreed to take the tail credit risk on SVB’s loans. A loss-share arrangement reduced the due diligence potential acquirers had to perform to evaluate SVB’s hard-to-value loan book, but it also increased the FDIC’s potential liability. The FDIC also offered banks—but again not nonbanks—cheap financing. This increased the FDIC’s costs and meant nonbanks seeking to bid on SVB had to quickly raise large amounts of private funds. We’re told that several nonbanks made competitive bids, but they needed more time to raise money and perform due diligence. Blackstone, for one, backed a bid by regional bank Valley National Bancorp. The FDIC insisted on closing a deal by the end of March 26, and its refusal to offer nonbanks the same terms as banks put alternative investment firms at a significant disadvantage. The winning bidder was First Citizens BancShares, which acquired SVB’s $72 billion in loans at a significant $16.5 billion discount with future losses shared with the FDIC. The FDIC also financed the deal with a five-year $35 billion loan plus a $70 billion line of credit to cover potential deposit flight. The FDIC estimates that the failure and rescue will cost its insurance fund about $20 billion. All of this shows how progressive ideology at the FDIC has cost taxpayers money. Letting nonbanks finance a takeover of failed banks, as they often take over other distressed companies, would minimize the FDIC’s liabilities. But it would anger progressives on the Senate Banking Committee who loathe private equity and view nonbanks as a threat to their political sway over the current banking system. Here’s looking at you, Sherrod Brown and Elizabeth Warren. What is the FDIC’s plan if another midsize bank fails? The Administration won’t let big banks acquire smaller ones. Yet midsize and community banks lack the capital to swallow a bank with $100 billion to $200 billion in assets. That means we’ll probably get another sweetheart deal for a competitor to take over the failed bank and then write off a big loss to the insurance fund. Great work, guys. WSJ Opinion: Kevin McCarthy's Vision for Economic Prosperity YOU MAY ALSO LIKE Addressing the NYSE, House Speaker Kevin McCarthy rejected President Biden's push for further debt, outlining a 3-point fiscal path that 'limits, saves and grows.' Images: Bloomberg News Composite: Mark Kelly Copyright ©2023 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8 Appeared in the April 19, 2023, print edition as 'How the FDIC Rigged the SVB Auction
Why would FDIC ever consider Blackstone a deal when BX doens't have the expertise or knowhow to run a bank, and have to raise money to do the buyout? This is not M&A, depositors' money is on the line.
Good post, just goes to show if you are or not part of the "Club", someone could make a strong legal argument for collusion. Akuma
It is no different than the old Wall Street club , which fights every rule change which benefits the retail trader.
I fail to see the problem here --- or what the whining is about in this article. To take over an FDIC insured bank you must be an FDIC insured institution. Some bank assets could be potentially sold off to non-FDIC insured institutions (mortgages, etc.). However only members of the FDIC have access to benefits such as loss-share arrangements, cheap financing, and other benefits. As it should be. Next people will be whining that they want access to all of a country club's benefits while not being a member. The FDIC does not have "progressive ideology" in the SVB situation -- these FDIC rules have been in place for decades -- including the era during the Savings & Loan crisis. And maybe it is time to remember that FDIC is funded by member fees -- not by tax-payers. It is an insurance entity. As expected only a media source deeply such as the WSJ in bed Wall Street, private equity firms, and other bottom scavengers who are disappointed they were not able to destabilize the U.S. Banking system by purchasing SVB assets on the cheap and running them poorly --- could have written this nonsense. This article is basically a paid pitch.
Ok so why did they open this auction or the acquisition bid to nonbank entities if the rule is very clear that only FDIC members are eligible in acquiring assets of another FDIC member banks? I mean if what you are saying is correct then these nonbank entities shouldn't be invited to bid at all and shouldn't even be "sent invitations" sorta speak in the first place. Why were they there then?
As mentioned by me (and in the articles) -- FDIC members are not the only entities eligible for acquiring assets of a failed banks. Mortgages, credit cards, and other business areas can easily be sold to other non-FDIC entities. However if you want to pick up the remnants of a failed FDIC institution and continue running it as a bank (under the same or different name) -- then generally you need to be an FDIC institution -- remember all the customers who deposited money in the bank signed account opening agreements that their money was FDIC insured -- so any purchasing entity needs to align with this. Any non-FDIC entity such as a hedge fund trying to buy a failed bank will normally partner with an FDIC insured institution to do so. Of course, this will allow the FDIC insured purchasing entity to get all the "FDIC perks" of loss-share arrangements, cheap financing, and other benefits -- with the backing hedge fund effectively being an investor.
%% Exactly [+they could easily see the stock the stock price of\ BX\52 weeks from MAR 26]. But it made sense to invite non bank players to the auction[if they did that?]; for the same reason people look @ more than one benchmark or one Realtor. State Farm is insurance co + FDIC bank. FOX news noted the auction failed first time ; then FDIC busted it up in 2 , FCNCA bought the non woke-non broke part of SVB.