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FDIC Nixed Private Equity Bid for Banks

Private equity firms looking for a loss-sharing deal with the federal government may need to shift their strategy if a recent informal bid for failed First National Bank of Nevada and First Heritage Bank is any indication.
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The Federal Deposit Insurance Corp. turned down a private equity firm's informal bid to buy

First National Bank of Nevada


First Heritage Bank

days before the federal agency took control of the failed institutions.

Belvedere Capital

, a San Francisco-based private equity firm, was prepared to buy the banks, which

were seized

by federal authorities July 25, according to a person involved in the negotiations. However, Belvedere wanted the FDIC to give it downside protection in case the loan losses reached a certain threshold.

The person declined to give specifics on the terms of the deal, but he said it would potentially have cost the FDIC less than the $862 million it lost in deciding to hold onto most of the loans and sell the $3.23 billion worth of deposits to

Mutual of Omaha Bank

. The source says Belvedere did not make a formal bid because the FDIC expressed no interest in a loss sharing deal, saying it didn't have time to analyze the loans.

FDIC spokesman David Barr says he cannot disclose the identity of unsuccessful bidders. "All I can say is the Mutual of Omaha bid was determined to be the least costly," he says.

Barr, however, does not contradict the source's characterization of why the FDIC wasn't interested in a loss-sharing deal with a private equity firm. "You can't guarantee losses when you don't even know what the losses are going to be on the portfolio," he says. Barr says he isn't sure how the FDIC arrived at the $862 million loss estimate cited in its press release. "Sometimes it is based on modeling, not on the valuation of the assets," he says.

The FDIC now must sell the troubled loan portfolios it took over from the banks. After an estimated $1 billion in writedowns, the portfolios are worth roughly $2.5 billion.

Belvedere had planned to use the banks' deposits to finance its acquisition of the loan portfolios, according to the person involved in the negotiations. Now that the FDIC sold the deposits to Mutual of Omaha, whoever buys the loans will either need to write a check for the entire $2.5 billion, or find a financing source. Since most banks are busy trying to reduce their exposure to the type of construction loans that dominate the FNBA portfolio, it is unclear whether any will be willing to finance such an acquisition.

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Another option the FDIC might pursue is to sell a partial stake in the loan portfolio, as it recently did in the case of


, an online bank that

failed last year

. The FDIC sold a 40% stake of one of Netbank's loan portfolios to an undisclosed investor, who will assume responsibility for servicing the entire portfolio. If the investor recovers an agreed-upon amount, it will be able to claim a 60% stake.

Nautilus Capital

Managing Director Laird Minor, who advised the FDIC on the sale of the NetBank unit and is currently working with the agency on the sale of a $1.2 billion portfolio from the now-defunct

Arkansas National Bank

, believes this transaction will be a model for FDIC sales of loan portfolios from failed banks.

"From the little involvement I've had, I don't get the sense that the

FDIC officials I'm working with have much interest in the traditional loss-sharing structure. I think they like this shared ownership structure a whole lot better," he says. Minor notes that because the shared ownership structure requires a smaller equity commitment than buying the whole portfolio would, it opens up the bidding process to a larger group of potential buyers.

Private equity firms generally are not able to acquire controlling stakes in banks because they do not want to register with regulators as bank holding companies. Belvedere is one of a small handful of firms that have done so. Others are

Castle Creek Capital

in Rancho Santa Fe, Calif. and New York-based

CapGen Financial

run by Gene Ludwig, a former U.S. Comptroller of the Currency.

There have been recent instances of private equity firms taking minority stakes in banks, however. These include

The Carlyle Group's

$75 million investment in

Boston Private Financial Holdings

(BPFH) - Get Boston Private Financial Holdings, Inc. Report

, a $7 billion investment in

Washington Mutual

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led by


and another $7 billion capital infusion in

National City


led by

Corsair Capital

earlier this year.

But if private equity firms looking at investing in the banking sector are hoping the government will protect them against their losses, they will need to shift their strategy.

Many banking industry M&A experts say the government is not likely to provide backstops to private equity firms looking to assume troubled bank loan portfolios. "There's no one who will ever get a backstop from the government in an open bank private equity investment," says Thomas Vartanian, partner at law firm

Fried Frank


There have been instances in which the FDIC has signed "loss-sharing" agreements with bidders on bank loan portfolios, though these were much more common in the late 1980s and early 1990s, according to Barr, the FDIC spokesman.

Asked why the FDIC didn't hold onto the deposits in order to give itself time to analyze the loans and use them as a carrot to a buyer in a later auction, Barr says the 4.4% premium on deposits paid by Mutual of Omaha is "one of the highest you're going to see," a view echoed by Nautilus Capital's Minor. Barr says that the FDIC prefers to protect the deposits and get depositors into a new banking relationship.

"While we have run banks, we generally don't do it as a matter of course," he says.