Partnership Gets Failed Bank of New England : Bailout: BankAmerica loses out in bidding to a Rhode Island bank and a major takeover firm.
Federal regulators Monday said that they will sell the failed Bank of New England to an unusual partnership of a Rhode Island bank and a major takeover firm in what will become the second-costliest bank bailout in U.S. history.
The partnership was selected over bids from San Francisco-based BankAmerica Corp., which had been viewed as the front-runner, and Bank of Boston.
Fleet/Norstar Financial Group Inc., based in Providence, R.I., and the Wall Street firm of Kohlberg Kravis Roberts & Co., involved in some of the biggest acquisitions and buyouts in the turbulent 1980s, agreed to provide $683 million in capital for Bank of New England.
“We are delighted to have this new capital coming into the bank system,” Federal Deposit Insurance Corp. Chairman L. William Seidman told a news conference. The winning bid will result in the lowest cost to the beleaguered deposit insurance fund, Seidman said.
BankAmerica was the biggest of the three bidders and had the strongest financial balance sheet. But it would have been a powerful outside competitor coming into the New England economy, already buffeted by a deep recession. Seidman denied that any political and economic concerns may have influenced the FDIC decision.
He said the winning bidders offered the best deal to the FDIC. In addition to the new capital for Bank of New England, the partnership offered an extra premium to the government. The FDIC will receive $25 million in cash and a $100-million issue of preferred stock.
Bank of New England was seized by regulators in January after being crippled by the region’s severe slump in real estate. The FDIC agreed in Monday’s sale to take responsibility for $5.5 billion in bad loans held by the bank, a surprisingly large share of the institution’s current assets of approximately $17 billion.
“The bank has been shrinking. The good assets have been disposed of,” Seidman said. The bank, which once had assets of $25 billion, “was managed very badly. That’s why it’s in our hands,” he said.
Fleet/Norstar has three years in which to transfer to the FDIC any additional loans that go bad or assets that are repossessed by the bank from borrowers.
The FDIC will borrow $5 billion from the Treasury to pay for the temporary cost of covering the bad loans made by Bank of New England. After it sells the foreclosed assets associated with the loans, the FDIC loss will range as high as $2.5 billion, Seidman said. This bailout would be the second-costliest ever, ranking behind the $3-billion cost to the insurance fund from the 1988 takeover of First Republic, a Dallas-based institution.
Choosing the partnership bid breaks new ground by allowing as a major partner in a bank the Kohlberg Kravis Roberts investment firm, best known for leading the buyouts of such firms as RJR Nabisco and Safeway Stores.
KKR will provide $283 million of the $683 million in capital but will have no management role in the bank, Seidman said.
KKR has a longstanding interest in banks. It sought unsuccessfully to buy the failed MCorp in Texas, and it owns nearly 10% of First Interstate Bancorp in Los Angeles.
But the firm’s involvement in Monday’s sale raised concern among bankers and members of Congress that federal officials have gone too far in shattering federal laws separating banking and commerce.
Rep. Joseph Kennedy (D-Mass.), a member of the House Banking Committee, predicted Monday that congressional banking committees will review the decision to allow KKR to be a partner in the deal.
“It raises some very serious questions about who ought to own banks,” Kennedy said.
In recent weeks, Bank of Boston, once thought to have no chance, made a surprisingly strong showing, rounding up capital from such investors as Warren Buffett and General Cinema Corp.
Bank of Boston Chief Executive Ira Stepanian said Monday that, while disappointed in losing, “we have gained an even stronger sense of confidence in ourselves and our institution as a result of this process.”
BankAmerica Chairman Richard M. Rosenberg congratulated the Fleet/KKR group and also expressed disappointment in losing. He said, “We entered a bid that we believe reflected the value of the franchise to us.”
BankAmerica executives have previously downplayed the bidding process, portraying the competition for the Northeastern bank as an ordinary business opportunity, rather than an event crucial to the bank’s future growth. BankAmerica’s strategy over the past year has been to buy failed thrifts throughout the West to build its branch network.
Most banking analysts were surprised at the news Monday because Fleet/Norstar was regarded as a distant third in the competition, while BankAmerica was always viewed as a front-runner. One senior banking regulator said as little as two weeks ago that the bank was “Bank of America’s to lose.”
But the choice of the Fleet/KKR bid silences potential criticism that the government would give the New England bank to an outsider, while bringing fresh capital to the region.
Rosenblatt reported from Washington and Bates from Los Angeles.
