Banking Law

Although many community bankers bemoan the write downs and loss reserves that have resulted from a cratered economy and zealous regulators trashing commercial real estate, some folks outside the baking industry think that banks haven't been beaten up enough on CRE loans. One of those is Texas banker Andy Beal, the subject of a number of posts on this blog. Beal, a bank owner himself, has made boatloads of money by doing what other bankers don't do. Mr. Beal definitely marches to the beat of his own drummer, and that drummer has made him one of the country's richest people.

Over the last couple of decades, Beal has bought loans with hair on them for a very cheap price, then shaved those loans and squeezed healthy profits out of them. He's one of the folks who knows what he's doing with bad commercial real estate loans. As we noted three years ago, a number of savvy investors have raised funds to buy "scratched and dented" CRE loans from banks that should be under pressure to get them off their balance sheets. That worked well for Beal and others for a few years, but according to Beal, in 2010 the deals have evaporated.

?Why were there so many great opportunities 12 months ago that are gone today?? asked Beal, owner and CEO of Beal Financial Corp. "There?s a sense that anybody who sells is dumb, and anyone who hangs on is going to save some money.?

According to Beal and other financiers, reasons include a surplus of deal-hunters looking to make a killing, sellers with incentives not to sell and an active government hand in the economy.

Those forces mean diminished opportunities for buyers like Beal, and delayed reckoning for the lending and real estate industries.

Some bankers agree that there's too much money chasing these deals, which tends to drive up prices.

?There?s just so much money out there chasing (distressed assets),? said Joe Goyne, president of Pegasus Bank, a 3-year-old Dallas community bank. ?They?re not going to make anything more than normal returns.?

Others blame the regulators for being too lenient and "allowing them to continue carrying bad loans on their books as if they were worth their full value." Ask the former owners and employees of failed banks like Charter Bank about that theory and be prepared to be run out of town on a rail. That simply doesn't conform to what we (and others) are seeing from our side of the table (while admitting that we're hardly unbiased).

To the contrary, I think that if asset values on the books have been hammered sufficiently by the bank, its auditors, and its bank examiners, and the bank doesn't fail, why would the bank then sell all of the upside to an outside investor? It might as well hang on to the loan, work it out (or foreclose as a last resort) and take whatever upside might be realized as the economy recovers.

Others think that FDIC loss-sharing encourages buyers of failed bank assets to hold onto the loans and get maximum value, which is definitely a change from the "good old days" when the RTC absorbed all the losses on the CRE of failed banks, liquidated the loans and assets at fire sale prices, and the the buyers had plenty of incentive to turn around and sell those assets for a below market price because the initial purchase price was so low.

?Back in RTC days, the government was taking all the loss on those notes,? said Keith Cargill, president of Dallas-based Texas Capital Bank. ?The incentive for the owner of the note was to liquidate the note at whatever price.?

Now, the FDIC is using a different technique in which the government and the buyer of a failed bank agree to share potential losses on bad debt.

?Today, the owner of the note is incentivized to get the maximum value on that asset,? Cargill said. ?It obviously slows down the sale of those assets, but it doesn?t depress the market price to what people can get on a quick sale.?

Therefore, it appears that much of the money that used to be made by buying assets outright from distressed banks and the "government liquidator" is now going to be made by buying failed institution assets in FDIC resolution transactions. Not surprisingly, Mr. Beal already figured that out and is well into that game.

This year, Beal is spending less time buying loans and more time acquiring whole failed banks. His Beal Financial Corp., through its affiliates, acquired a failed Alabama bank in December and a New Mexico bank in January.

?There are good opportunities out there in failed banks,? Beal said. ?It?s a tougher decision because you have to operate these banks in markets you don?t know well.?

It's not amazing that when the herd is running one way, the guys who make the most money are running another way.