The post discusses the recently disclosed bids in the Federal Deposit Insurance Corporation’s May 2009 auction of BankUnited Financial Corp. The bids show that the “highest” bidder did not necessarily win the auction, and that the FDIC’s decision making process is less formulaic than might be expected.

Auction Bids Publicly Disclosed Following Embargo

On June 25, 2009 the FDIC publicly released for the first time the formerly sealed bid forms submitted on May 19, 2009 by all three bidders in the auction for BankUnited Financial Corp. The FDIC made these bid forms available through its Freedom of Information Act Service Center. The documents provide insight into the FDIC’s auction process, and in particular confirm that, at least in this case, submitting the arguably “highest” economic bid did not guarantee success before the FDIC.

The FDIC announced the closure, receivership and sale of BankUnited on May 21, 2009. The successful acquisition group included a management team led by John Kanas, former chairman of North Fork Bancorp, and an ownership group comprised of WL Ross & Co., Carlyle Investment Management, Blackstone Capital Partners V, Centerbridge Capital Partners, LeFrak Organization, Inc., The Wellcome Trust, Greenaap Investments, and the East Rock Endowment Fund. However, the FDIC-run auction also attracted bids from two other groups. These two unsuccessful bidding groups were led by J.C. Flowers & Co. and Toronto Dominion Bank, respectively.

Rejection of “Higher” Bid Reveals FDIC Concerns

The FDIC’s rejection of the Toronto Dominion bid is not surprising as TD applied a much larger discount to the value of the failed bank’s assets than did the bids from J.C. Flowers and John Kanas, bidding as JAK Holdings, LLC. However, the FDIC’s rejection of the J.C. Flowers offer is interesting because that bid applied a smaller asset value discount and a larger deposit premium than did the successful JAK Holdings bid. A review of the bid forms and comments from parties familiar with the FDIC process suggests that the J.C. Flowers bid was rejected because regulators were concerned about how to evaluate future losses under the loss-share agreement to be entered into between the FDIC and the successful bidding group. A notation on J.C. Flowers’ bid form placed by the FDIC staff suggests that J.C. Flowers sought the ability to transfer – without FDIC approval – BankUnited assets subject to an ongoing FDIC loss-share obligation.[1] The FDIC may be concerned about allowing future transfers of assets accompanied by the FDIC’s loss-sharing obligation to unknown parties because its estimated recovery value for the assets, one of the risks to the future health of the Deposit Insurance Fund and therefore an important factor in the statutory “least cost to the FDIC” test, is likely tied to the knowledge and experience of the party that controls and manages those assets.

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