March 8 (Bloomberg) — The Federal Deposit Insurance
Corp. is trying to encourage public retirement funds that control more
than $2 trillion to buy all or part of failed lenders, taking a more
direct role in propping up the banking system, said people briefed on
Direct investments may allow funds such as those in
Oregon, New Jersey and California to cut fees for private-equity
managers, and the agency to get better prices for distressed assets,
the people said. They declined to be identified because talks with
regulators are confidential.
Oregon’s retirement fund may contribute $100 million
as regulators seek “the support of state pension funds to solve the
crisis surrounding ongoing bank failures,” Jay Fewel, a senior
investment officer at the Oregon State Treasury, said in a presentation
at the fund’s Feb. 24 meeting. New Jersey’s fund may also participate,
said Orin Kramer, chairman of New Jersey’s State Investment Council.
The FDIC shuttered 140 lenders last year and expects
the tally may be higher in 2010. Regulators have avoided signing up
private-equity firms as rescuers on concern that they might take too
much risk. Pension funds, whose 100 largest members manage $2.4
trillion, could provide capital to acquire deposits and outstanding
loans from collapsed banks, according to the people.
“The FDIC is constantly looking at structures where
we can get the greatest opportunity to tap into capital that we have
not had the success reaching through previous disposition methods,”
FDIC spokeswoman Michele Heller said in an e-mailed statement. “We
welcome and work with all investors.”
Current rules don’t prohibit pension funds from
buying failed banks. Until now, they have typically chosen to invest
through private-equity firms using limited partnerships, which gives
pension funds little to no control over the day-to-day management of
the investments. They also pay management fees levied on the amount of
money committed as well as a percentage of any profit.
“We’ve been examining a broad range of alternatives
to take advantage of what I believe are attractive transactions coming
out of the FDIC,” said New Jersey’s Kramer. The state pension system
faced a shortfall of about $46 billion as of last year because of
investment declines and a failure to make full contributions, according
to annual financial reports.
Oregon State Fund
Oregon would invest in Community Bancorp LLC, a bank
being formed by Sageview Capital LLC, according to the Oregon
presentation. Sageview was founded by former Kohlberg Kravis Roberts
& Co. executives Scott Stuart and Ned Gilhuly. Sageview is looking
to raise about $1 billion from pension funds and similar investors, the
While the structure makes sense, pension funds would
be better off investing in existing banks, said Chris Whalen, managing
director of Institutional Risk Analytics of Torrance, California. At
those lenders, management will oversee details of buying failed lenders
and save pension funds the time and effort needed to launch a new bank,
“If they are really interested in playing this area,
they should put their money into a larger bank that’s already playing
here,” Whalen said. “If you look at the risk-reward and the distraction
involved, it’s not worth it” to back a new bank, he said.
Investing in distressed banks doesn’t always pay
off, as the U.S. Treasury Department learned with the Troubled Asset
Relief Program. At least 60 lenders skipped some of their promised
dividends to the TARP fund, according to SNL Financial, and a $2.33
billion stake in CIT Group Inc. was wiped out last year when the lender
Amegy’s Paul Murphy
Sageview, based in Greenwich, Connecticut, and Palo
Alto, California, would get yearly fees as an adviser and would also
invest about $100 million of its own. Ruth Pachman, a spokeswoman for
Community Bancorp, declined to comment.
Community Bancorp will look to buy three or four
banks in the next three years and will be run by Paul Murphy, the
presentation said. Murphy built Houston-based Amegy Bank into a $12.3
billion-asset lender over more than a decade, and it’s now owned by
Salt Lake City-based Zions Bancorporation.
“We’re pleased with the Oregon decision,” Murphy
said in an interview. He declined to comment further as the group is
still raising capital and in a “quiet period.”
Spokesman James Sinks at Oregon’s Treasury said the state is still negotiating its commitment, and declined elaborate.
After the credit crisis ate into private-equity
returns, pension managers started looking for ways to trim fees and
boost returns. The California Public Employees’ Retirement System, the
largest U.S. public pension fund, said in a Feb. 16 presentation that
one of its goals is to increase its “co-investments” in transactions
alongside money managers. That kind of structure could give the pension
fund an actual stake in firms purchased, rather than the private-equity
firm’s buyout fund, according to the people.
Known as Calpers, the pension fund plans to “explore
unique structures with select general partners,” according to the
presentation. The fund’s investment portfolio was valued at $203.3
billion as of Dec. 31, according to the Calpers Web site. Spokesman
Brad Pacheco didn’t respond to a request for comment.
Regulators have been debating how much leeway to
give private buyers of failed banks on concern that they’re more likely
to put federally insured deposits at risk, or will look to flip the
bank for a quick profit.
Private-equity managed funds typically promise
they’ll return funds to their investors in about 10 years. Pension
funds are aiming to fund retirements that are decades away and thus can
hold on to investments longer, which would help ease the FDIC’s
concern, said one of the people.
FDIC guarantees may soften the risk of investing
public pension money in distressed banks, Whalen said. When the FDIC
sells a failed bank, it typically shares a portion of the loan losses.
“Financially sophisticated people do not assume that
banks have recognized all of their real estate losses,” Kramer said,
adding that it can still be a bad deal if a buyer overpays for a
deposit franchise or if loans perform worse than expected. “We are in
the early innings for commercial real estate.”
–With assistance from Cristina Alesci and Michael J. Moore in New
York and Michael Marois in Sacramento, California. Editors: Rick Green,
To contact the reporter on this story: Dakin Campbell in San Francisco at [email protected].