Failed banks for sale...who's buying?

A move by regulators to open up the failed bank bidding process has sparked a wave of investor interest. But experts are wary about its real impact.

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By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- More banks will certainly fail in the months ahead, but at least regulators shouldn't have any trouble finding buyers.

Last month, two of the nation's top banking regulators - the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency - widened the buyer pool for failed banks by opening up the bidding process to both investor groups and individuals.

Traditionally, this process has been limited to chartered banks and savings institutions. But regulators changed their stance partly in response to strong demand from non-bank investors and expectations that the supply of failed banks will grow in 2009.

So far this year, only 26 of the more than 8,400 FDIC-insured institutions have failed. But with 171 institutions on the FDIC's so-called 'problem bank' list as of the end of the third quarter, it's likely that the assets of many more failed banks will be up for grabs next year.

Waiting for a failure

Despite some high-profile bank mergers in the past few months, there has yet to be a major wave of consolidation in the industry since many banks have been afraid of inheriting another company's troubled loan portfolio.

Instead, many banks have waited for others to fail outright before stepping in. That's because once the FDIC assumes control of the failed bank's troubled assets, an acquirer can get deposits on the cheap and a clean balance sheet.

Officials at the OCC and FDIC were unable to provide any figures as to how many investors have applied to buy failed banks so far. But they said interest in the program has been robust since it first launched.

One firm that has already won conditional approval to bid for a failed bank is Ford Group Holdings, an investment group which includes long-time Texas bank investor Gerald J. Ford.

That interest could extend to wealthy individuals who want to break into the banking game and even private equity players.

Christopher Flowers, who runs the buyout shop J.C. Flowers, scooped up a tiny bank in northern Missouri with $14 million in assets in August. At the time, he hinted at plans to expand.

But private equity investments in the U.S. banking industry have fared poorly this year. The $7 billion stake in embattled savings and loan Washington Mutual taken by private equity giant TPG was wiped out after the savings and loan giant collapsed in late September. So buyout shops may be reluctant to place any more bets.

"I think you have investors sitting on the sidelines saying 'Let's just wait and see how the entire business model shakes out,'" said Jess Varughese, managing partner at Milestone, a New York City-based management consulting firm that focuses on the financial services industry.

Jennifer Thompson, an analyst at the New York-based financial services research firm Portales Partners, added that the move to open up the bidding process for failed banks is largely symbolic anyway since banks themselves already have a hearty appetite for the deposits of failed rivals.

"It is just adding to the perception of liquidity in the market," she said.

Cautionary tale

Nonetheless, regulators have said they hope that by relaxing standards about who can participate in the program, they can fetch a better price for the assets of failed banks and better returns for the FDIC's deposit insurance fund.

The agency estimates that the fund, which is used to guarantee deposits when a bank fails, will suffer about $40 billion in losses through 2013.

Last summer's collapse of the California-based IndyMac wiped out $8.9 billion from the fund. Regulators have yet to announce a buyer for the troubled mortgage lender.

But the program is not without its risks.

Faced with an overwhelming number of bank failures, banking regulators enacted a similar move during the savings and loan crisis of the 1990s. That backfired, however, after a number of failed institutions were sold to developers which used the bank to fund their own businesses.

"The regulatory agencies may be looking at some individuals that are very astute," said one former staffer for the Resolution Trust Corporation, which the federal government created to help handle failed institutions during the savings and loan crisis. "That may look good now, but nobody really knows." To top of page

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