It’s been a week since the Federal Deposit Insurance Corporation swept away ShoreBank’s bad assets (cost: $367.7 million), changed its name to Urban Partnership Bank, and left it largely in the hands of the same people (and investors) who ran it before. Since then there have been several articles that called the process and new arrangement “unusual.” I guess institutions loved by two presidents call for special treatment.
Distinctions need to be made to fully understand what transpired. ShoreBank, the community development lending institution and bank with a presence in Chicago, Detroit and Cleveland, was owned by a holding company: ShoreBank Corporation. The bank failed, but not the holding company, which still oversees some community development nonprofits, an international microlending advisory company, and a bank it co-owns in the Northwest. FDIC announced the parent corporation would continue to operate, but that its “investment in ShoreBank is now worthless.”
Real Estate Journal Online reported the oddities of the arrangement:
Industry analysts said that the FDIC move was unique as its own regulations dictate that investors with more than 10 percent interests on a failed bank were automatically prohibited from bidding on its assets….
A source familiar with the deal revealed that ShoreBank has been effectively resurrected by a holding company largely comprised by Goldman Sachs, Morgan Stanley and Bank of America, all of whom by sheer coincidence have received some $400 million of federal funds to keep the bank alive and strutting.
Deducing from the FDIC statement on ShoreBank’s current standings on its assets and deposits, industry pundits said that the bank holds about 70 percent less of its face value and the group of investors currently managing it were actually collecting multimillion of federal funds in ensuring that the bank’s existing deposits were being serviced.
On top of that and according to a source privy to the ShoreBank-FDIC dealings, the bank’s auction was almost automatically awarded to Urban Partnership and the FDIC supported its decision by arguing that “it saved the FDIC’s insurance fund $250 million to $334 million over liquidation.”
Analyst Mike Shedlock characterized the whole process as fraught with glaring irregularities as he scored deliberate efforts to keep ShoreBank afloat at all cost no matter if irregularities marred its auction, its new management and the preference shown to giant US investors in taking over the failed bank.
An Atlanta lawyer with experience in bank acquisitions and mergers, Ralph “Chip” MacDonald, has been quoted in a few ShoreBank stories noting the unusual nature of the FDIC action. I asked him if it was normal for FDIC to leave a failing bank’s parent company standing. He responded, “It is common for parent holding companies to remain after their bank subsidiaries are placed in FDIC receivership. Usually the parent holding companies file for bankruptcy soon after their bank subsidiaries fail. These often start as Chapter 11 reorganizations, but in may cases, are converted to Chapter 7 liquidations. The FDIC may assert claims against the parent holding companies of failed banks.”
So it remains to be seen what will happen with ShoreBank Corporation, whose identity was primarily tied into the bank that has now failed. And whether the holding company has any other worthwhile assets or not, FDIC is apparently not asking it to relinquish any of them to reduce the burden on the Deposit Insurance Fund or on Urban Partnership Bank’s new investors.
In fact, the other bank the corporation co-owns in the Northwest — ShoreBank Pacific — is getting away without any impact from the FDIC action. In being allowed to be absorbed by another community development institution, OneCalifornia Bank, the ShoreBank “green” lender is also receiving special treatment from FDIC, as Sustainable Business Oregon reported yesterday:
(ShoreBank Pacific CEO David) Williams said the sale will make it easier for ShoreBank Pacific customers to find capital. The lender’s Chicago parent recently hadn’t provided enough financial backing to ShoreBank Pacific to offer its customers more credit.
Federal regulators exempted ShoreBank Pacific from the Chicago lenders’ takeover after signing off on the Ilwaco bank’s balance sheets.
ShoreBank Pacific’s risk-based capital ratio is 8.58 percent, short of the 10 percent level that regulators consider healthy but easily exceeding levels considered “troubled.”
ShoreBank Pacific’s 42 percent liquidity level — measured in terms of liquid deposits — is also well above the regulatory danger zone.
During the regulatory actions, the Federal Deposit Insurance Corp. gave ShoreBank Pacific what Williams called a “waiver” that spared his operation from having to cover the Chicago operation’s losses.
The waiver signaled to Williams that ShoreBank Pacific should begin seeking buyers.
Williams told the Puget Sound Business Journal that “the consent order under which we are operating required us to find additional capital to divest ShoreBank Pacific from our Chicago holding company, ShoreBank Corporation, due to the ailing condition of our Chicago-based sister bank, ShoreBank.” So rather than require Pacific to pay for the sins of its sibling, it was told by government to leave the family. Thus not only was the progressives‘ community development program spared, but so also was its green agenda.
Political Pressure Saved ShoreBank Management
FDIC Seizes ShoreBank; Installs Management in New Bank
ShoreBank to be Split and Saved?
Can Chicago Lobbying Save ShoreBank?
Is ShoreBank Sheila Bair’s Baby?
Goofy Green Investments Fueled ShoreBank’s Problems
ShoreBank President Uses Saul Alinsky Playbook
White House Denial on ShoreBank is Sestak-Like
‘Firestorm’ Promised to Save Politically-Connected Chicago Bank
White House Bails Out ‘Clinton’s Favorite Bank’ Through Goldman Sachs, Citigroup, GE