The failure of IndyMac Bank in July was a pivotal moment in the credit crunch, with images of anxious depositors outside its branches sparking bank runs across America. Now the money is flowing the other way. On January 2nd the Federal Deposit Insurance Corporation (FDIC), which has been running the Californian lender since its collapse, said it had provisionally agreed to sell its remnants to a group of private firms with links to famed investors like George Soros and John Paulson. The consortium is led by Steve Mnuchin of Dune Capital, who reportedly worked so hard on the deal over the holidays that he only bought presents this month.
Such dedication is admirable, but is it wise? What remains of IndyMac’s franchise is of questionable value, to put it charitably. It loaded up on dodgy mortgages, and most of its deposits were of the unstable brokered sort (today it has a mere $6.5 billion). But the deal’s terms are suitably sweet. The buyers must absorb the first 20 percent of losses on the loan portfolio (which is being written down before the deal closes). The government will soak up most of the rest, and also provide financing for the difference between the $1.3 billion of fresh equity and the overall price tag of $13.9 billion.
Moreover, IndyMac may be merely a means to a greater end. The plan is to rebrand it, refocus it on sounder mortgages and use it to roll up other troubled banks as they become available. “Now you have a credible vehicle that can participate in rescues over a weekend,” says a person close to the buyers, who “can add more capital as they please.”
They will not be short of choice. The rate of bank and thrift failures in America began to surge in 2008 after several blissfully quiet years (see chart). Another sharp rise is expected in 2009, towards levels not seen since the early 1990s. Now that sovereign-wealth funds have retreated, hit by investment losses and a sagging oil price, private equity is perhaps the most promising source of private capital.
It, too, has been burned. TPG’s $2 billion investment in Washington Mutual was largely wiped out when the thrift buckled. But the industry’s greybeards know that great fortunes can be made by those with the wherewithal to invest during banking busts, when some assets become hugely undervalued. (Witness the deal a few days later for PennyMac, a mortgage-investment firm, to buy $558 million of loans from the FDIC at a hefty discount.) Hence the recent wave of fund-raising: some 60 private-equity funds focusing partly or completely on financial services were set up in 2008, according to Preqin, a research firm. Another 114 are in the works.
For their part, regulators know that beggars can’t be choosers. They have relaxed the rules on private-equity ownership of banks in recent months. No longer do private-equity groups have to worry that buying a lender will expose the rest of their operations to scrutiny by bank supervisors.
But they do need to worry about what they buy, and IndyMac is no guaranteed winner. It faces intense competition in its home state, especially for deposits, from the likes of Wells Fargo and Bank of America. The buyers have agreed to continue an experimental loan-modification scheme launched by the FDIC, which could complicate their plans. No one knows when housing will recover. And all banks face tougher regulation, which will hurt profits.
Still, the deal could prove a template. It suggests private capital will be attracted if the government continues to backstop deals. And where else can private equity get leverage these days apart from in banking, an intrinsically leveraged business?