BankUnited Sale to Private Equity Sets Dangerous Precedent, Increases Economic Risk at the Wrong Time

WASHINGTON, DC - The Service Employees International Union is raising a red flag on last week's FDIC deal to sell Florida's BankUnited to a consortium of private equity firms.

"After last fall's economic collapse and the revelation of the true extent of the problems in the banking industry, one thing is clear: we need to ask a lot more questions before the barbarians storm the gate," said Anna Burger, SEIU's Secretary Treasurer and a member of the President's Economic Recovery Advisory Board. "The track record of private equity funds controlling lending institutions rivals the success of the Chicago Cubs in reaching the World Series. Without proper safeguards, SEIU believes that allowing private equity firms to take over a federally-insured bank at a bargain-basement price drastically increases 'moral hazard' and runs the risk that unregulated investment firms will use these institutions as their own 'in-house' lenders."

Word that the FDIC may loosen restrictions on private equity ownership of banks, opening a floodgate as the prospects increase for increasing bank failures in coming months, has alarmed industry watchers and consumer advocates. BankUnited is the 34th insured bank to fail this year.

"These questions and concerns need to be addressed or the BankUnited deal may turn out to be another bonus to corporations at taxpayers' expense," Burger concluded.

Background on the BankUnited Deal
Four private equity investors have teamed up to buy BankUnited, a bank with $12.7 billion in assets and $8.3 billion in deposits, for only $900 million. Now the FDIC is committing to share in the losses on $10.7 billion (84%) of the bank's assets. The FDIC estimates a loss of $4.9 billion to its Deposit Insurance Fund.

In addition, the new owners of BankUnited will most likely receive federal subsidies in the form of

• BankUnited's ability to raise funds at below-market interest rates by offering FDIC-insured deposits, and
  
• BankUnited's ability to issue FDIC-guaranteed bonds at rates that are barely above current Treasury-bill rates.

Questions raised by this and potential future deals:

How does the "source of strength" doctrine apply to the private equity firms that will collectively control BankUnited? If it does not apply to them, then are there any limitations on the private equity firms' exercise of control over the BankUnited? The Federal Reserve imposed new control restrictions on both Cerberus and General Motors when it bailed out GMAC last year. Will similar restrictions be imposed in the BankUnited deal?

How much equity capital is each of these firms contributing? The FDIC says that the $12.7 billion BankUnited will be capitalized with $900 million in cash. Is that all equity, or will some of it be debt-financed? Are there limits on the investors' ability to take their cash out? Are the private equity firms required to maintain their investment for any length of time?

Will the FDIC and taxpayers share any gains, or is BankUnited another example of socialized risk and privatized profit, where the taxpayers will be on the hook for most of the losses, while the private investors will reap all of the gains? In the case of GMAC, if Cerberus isn't being required to absorb any losses, why should the federal government infuse some $14 billion of taxpayer funds into GMAC Bank? If Cerberus is incurring losses, why aren't those losses being publicly disclosed? Don't taxpayers deserve to know that they are not the only ones being asked to bear the burden of the GMAC bailout?

Will there be any limits on the ability of BankUnited to make loans to the controlling private equity firms or their portfolio companies? Any private equity firm that invests in a bank or thrift, as well as all of its portfolio companies, should be prohibited from doing any new business with that bank or thrift, and it must be required to disclose any existing business, advisory or transactional relationships between the firm, any of its portfolio companies, and the bank or thrift.

Recent notable private equity deals include:

• Cerberus' deal for GMAC, which received a $7.5 billion taxpayer bailout last week on top of an earlier government bailout of $6 billion;
  
• TPG's disastrous investment in Washington Mutual last year, which ended with a fire sale to JP Morgan Chase that wiped out TPG's investment; and
  
• JC Flowers' investment in Japan's Shinsei Bank (f/k/a Long Term Credit Bank) and Cerberus's deal for Aozora Bank, which published reports indicate are preparing to merge in order to attempt to solve their continuing problems.

With 2 million members in Canada, the United States and Puerto Rico, SEIU is the fastest-growing union in the Americas. Focused on uniting workers in healthcare, public services and property services, SEIU members are winning better wages, healthcare and more secure jobs for our communities, while uniting their strength with their counterparts around the world to help ensure that workers--not just corporations and CEOs--benefit from today's global economy.

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