By Ted Sickinger, The Oregonian
March 03, 2010, 7:37PM
In a deal being pitched as a home-run investment opportunity for the state pension fund, Oregon's public pensioners may be about to buy stakes in several of the 700 troubled banks around the country that are wallowing in bad loans.
The deal's unusual structure and hefty fees raise concerns, particularly in light of the Oregon Investment Council's recent insistence that it would push for better terms, more transparency and better corporate governance from investment managers it does business with.
The transaction also provides a window into how Wall Street financiers are lining up to unwind the banking crisis that many helped create -- with high potential for another round of windfall profits for savvy investors.
The citizen's council that oversees the Oregon Public Employees Retirement Fund gave its approval last week -- subject to final fee negotiations -- to invest $100 million in a bank holding company being organized by Sageview Capital, whose partners bring deep experience in the world of leveraged buyouts.
Community Bancorp would be run by a handpicked team of bankers. And its board of directors is stacked with industry heavyweights. They include William Harrison, the former chief executive of JPMorgan Chase, and Robert Steel, who rose to vice chairman of Goldman Sachs after 30 years with the firm, served under former Treasury Secretary Henry Paulson, and headed Wachovia Bank prior to its emergency buyout by Wells Fargo.
Both executives and the institutions they led carry some baggage -- in public perception at least -- from the banking debacle. But from Community Bancorp's perspective, they bring the industry bona fides that will inspire regulator confidence.
The company intends to buy and restructure one to five of the 700 banks that are on the Federal Deposit Insurance Corporation's troubled bank list, then sell them in an initial public offering, or sale to another bank.
According to a presentation to the Oregon Investment Council by Harrison and Sageview partner Scott Stuart, the FDIC is so anxious to recapitalize troubled banks that it is willing to cover 80 to 95 percent of buyers' loan losses as well as the costs incurred in restructuring loans.
That's a potentially lucrative deal for discount bidders who can clean up problem loans and get the bank into growth mode before selling it. Stuart suggested that it wasn't unrealistic to think Oregon could double its money over several years.
"The government is handing out free money," enthused council member Dick Solomon, a Portland accountant. "Maybe we should get in line."
The catch: Stuart and Harrison said the FDIC is reluctant to sell controlling interests of federally insured banks to private investors, and particularly to leveraged buyout specialists, because they are perceived as quick hit artists "who aren't good stewards."
This summer, the FDIC adopted a new set of policies requiring "non-bank" buyers to retain ownership for three years and maintain double the normal capital ratios. The policy also prohibits "complex and functionally opaque" structures.
Community Bancorp would adopt the classic operational model of a private equity deal -- buy cheap, restructure, then sell the bank through an initial public offering or private sale. But it would be structured as a limited liability holding company funded by passive investors. None would hold a controlling block of voting shares, though Sageview would get a seat on the board of directors.
Stuart said the structure takes care of political problems with the FDIC. And by keeping investors' voting stakes under 9.9 percent, it avoids onerous restrictions on investors that kick in under the federal Bank Holding Company Act.
According to Patricia McCoy, a University of Connecticut law professor who specializes in banking regulation, any structure that seeks lighter regulation is likely to give the FDIC pause. She also said the profits being contemplated sound far too aggressive in an industry where annual returns historically average close to 7 percent.
Raj Date, executive director of the Cambridge Winter Center, a financial industry think tank in Washington, D.C., said he saw little problem with the structure of the deal, as "everyone and their brother is out there trying to put together a fund to do exactly this."
But he doubts returns would rival a private equity deal, or that the FDIC would consistently extend generous loss sharing deals to private buyers. The FDIC is wary of granting sweetheart deals, a perception it faced after selling IndyMac Bank to a group of firms run by ex-Goldman Sachs bankers.
"It's a massive transfer of wealth," Date said. "Why not transfer that wealth to another banking company?"
From Community Bancorp's standpoint, there's more than enough troubled institutions to go around, with a small pool of traditional banks capable of rescuing them.
A spokeswoman for the company said Wednesday that the structure was similar to several that regulators have already approved, and that Community Bancorp is ready to comply with stricter capital requirements and the lock-up period imposed by the FDIC.
The OIC clearly liked the pitch, though they questioned the deal's rich fee structure, which could include stock options for the board and management equal to a 20 to 25 percent stake in the entire holding company. That's in the neighborhood, if not richer, than private equity transactions -- and fees that the council says it's trying to control.
One outside observer at the meeting was alarmed by the deal. Bill Parish, a local investment advisor who tracks the state pension fund's investments, said the deal's architects are showering themselves in stock options. He questions whether Sageview, as one of the deal's orchestrators and board members, would really be exercising some form of control.
"Rather than functioning as a fleecing catalyst for (leveraged buyout) artists, the OIC should instead roll up its sleeves and find better partners to accomplish the same goal of investing in failing banks," he said.
Keith Larson, an Intel Capital executive who is vice chairman of the state investment council, did express concern that a direct investment in a bank holding company doesn't offer the diversification that the pension fund typically gets by investing in funds.
"There's risk in everything," Ron Schmitz, Oregon's chief investment officer, said in a later interview. "It's not a free lunch, but we think the risk-reward profile is favorable."
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