Banking Law

Bailout Recapitalization Program: Will It Be Boom Or Bust?

 It's funny how your perspective changes, depending on whether you're on the inside looking out or on the outside looking in.

Today, Secretary of the Treasury Henry Paulson claimed that banks from all sides were beating down his door to get some of that good, old recapitalization mojo working for them.

Banks of all sizes are interested in a piece of the federal government's $250 billion fund to recapitalize financial institutions, Treasury Secretary Henry Paulson said Monday.

"We have received indications of interest from a broad group of banks of all sizes," he said at a briefing in Washington.

[...]

Banks must apply for funds by Nov. 14, Paulson said. They must consult with their primary federal regulator before applying.

Better hurry, banks of all sizes! Get the capital while it lasts! Don't be the bank on your street corner not to be the beneficiary of the bailout!

Strangely, we found evidence that not all banks were salivating over the ability to sell preferred stock and warrants to the Feds, even at the "low, low rate" of only 5 per cent per annum.

Banks, however, may not rush to sign up for the infusion, said Sean Ryan, analyst with Sterne Agee. Executives may be concerned about the stigma and about letting the government into their affairs, though the government stake does not have voting power.

That certainly seemed to be the case in a couple of stories in the business press today. From Colorado came word, via the state banking commissioner, among others, that banks there weren't a mile high with glee over the opportunity, although some were taking a "wait and see" attitude.

?I would have to assume that we won?t see as many local banks taking advantage of it, but that?s just speculation,? said Jennifer Saltzman, vice president of the Colorado Bankers Association, several hours after the Oct. 14 announcement. ?Colorado banks are in good shape, and it seems to be geared at distressed banks.?

Not so fast, some bankers say.

?Would I do it? I might,? said Jay Davidson, founder and CEO of First American State Bank in Greenwood Village, on Oct. 15. ?I?m looking at it right now, honestly. But I don?t want to.?

The problem is, banks that have been active commercial real estate lenders, such as First American, now are under pressure from regulators to increase the amount of capital they hold relative to loans they make.

?I?ve always lent to commercial real estate,? Davidson said. ?I haven?t changed the way I lend, but now they?ve changed the rules on me. What they?re basically saying is ?your bank is fine, you?re doing great, but I don?t think I like 10 percent risk-based capital anymore. I want 12 percent.? And you know what it takes to raise that kind of money. There?s no trust-preferred market. I can?t get debt to fund my capital right now. This would be the worst time in the world to dilute my shareholders by issuing common stock.?

The obvious step is to stop making new loans, and reduce some of the loans already on his bank?s books.

?But that is totally contrary to what we should be doing, which is lending into this market,? Davidson said.

[...]

?It?s going to take a little while to see what impact this has and how it filters down,? said Colorado Banking Commissioner Richard Fulkerson. ?To a large extent it seems like the community banks are going to be pretty well isolated from this.?

Although some large banks have signed up to participate, ?trying to extrapolate from that what impact it?s going to have on FirstBank, or Alpine Banks, or some of the larger organizations here in the state, I?m having a difficult time drawing a connection,? Fulkerson said.

Fulkerson's sentiments were echoed on a national level by Edward Yingling, CEO of the American Bankers Association and Cynthia Blankenship of the Independent Community Bankers of America. 

Of the regional and community banks we've personally spoken with about the program, most are in good condition (at the moment, at least) and not in need of additional capital. Some, in anticipation of worsening economic conditions, to prepare for pressure from the regulators along the lines of that outlined by Mr. Davidson above, to take advantage of acquisition opportunities that are likely to present themselves during this period of likely consolidation, or all of the above, have raised additional capital from the public markets (for those who are owned by a publicly-traded holding company) or from private sources (mainly, existing investors, in the case of privately-owned banks). They aren't interested in having the federal government sticking its beak further into their nest. They're aggravated enough as it is with the second-guessing that has been going on since this crisis hit the fan. On the other hand, some, like First American, are "thinking about it."

Many of the institutions most seriously considering this program appear to be those who are under pressure (in some cases, extreme pressure) to raise capital, in order to avoid, or to comply with, formal enforcement action. I anticipate that there will be many of those who will seriously explore with their primary federal regulator and the Treasury whether they currently qualify, or, more likely, what changes must be made in order to qualify. In some cases, that may mean a change in management, or even a change of control. In other cases, the US Treasury-infused capital may have to be accompanied by additional capital from private sources. I can see the promise of the infusion of Treasury capital being used as leverage by the regulators to quickly force through some management or other operational changes that might otherwise take more time and effort.

While Treasury has touted the recapitalization program as one designed for "healthy banks" (like the original "Gang of Nine"), this process may be similar to the operation of a car wash. Some cars come in only slightly soiled and others come in completely filthy. By the time they exit, they're all spic and span.

We live in interesting times, don't we?

Full post as published by Bank Lawyers Blog on October 20, 2008 (boomark / email).