Vulture Investors Making Plans to Snag Weak Banks on the Cheap
Even before the ink dries on a proposed $700 billion bailout for the financial industry, Wall Street players have begun jockeying to be the first ones to snap up distressed investments on the cheap.
As they try to make sense of how a government bailout would play, vulture investors are combing through balance sheets of possible targets that could run into trouble if banks start calling back loans to businesses and the economy worsens.
In the beaten-down banking industry, private equity investors are scrambling to find investment opportunities in downtrodden community and regional banks that can be nursed back to profitability in a turnaround.
In the coming weeks and months, these investors are betting the opportunities will become clearer. They are preparing for a field day for deals, not only in the financial industry, but in the industrial, retail and other sectors where the flagging economy and tight credit will push more companies to the brink.
In a sign that the climate of fear that had frozen some big deals may be thawing, Warren E. Buffett announced plans Tuesday to invest $5 billion in Goldman Sachs . Analysts also questioned whether Morgan Stanley , the venerable investment bank, could still become a takeover target even after it secured a huge investment on Tuesday by Mitsibushi UFJ Financial Group.
“There is a growing crowd of hedge funds and private equity firms and stronger banks that are shopping. They are all going to bid against each other,” said Christopher Whalen, a managing partner at Institutional Risk Analytics. “A lot of my clients see financials in 2009 and 2010 as being a huge home run,” he added.
To be sure, it is still unclear how firms that buckled under the weight of toxic mortgage assets will be treated under the plan of Treasury Secretary Henry M. Paulson Jr. to stabilize the housing market — the root of the crisis that has left a litter of banks and companies scattered across the economic landscape for vulture buyers to pick through.
Indeed, Mr. Paulson and Ben S. Bernanke, chairman of the Federal Reserve, spent much of the day in tense testimony before skeptical members of the Senate Banking Committee. The outlines of the emergency plan appeared uncertain after lawmakers raised concerns about its size and scope, driving the stock market sharply down for a second day.
As long as that continues, the fate of several big banks whose fortunes may yet be altered by the final contours of the rescue package remain in flux.
Washington Mutual , one of the nation’s biggest and most troubled financial institutions, remains locked in a dance with several suitors, all hestitant about a union until they can understand more clearly just how the government’s plan to siphon soured assets out of banks like WaMu will work.
The banks bidding for Washington Mutual — like J. P. Morgan , Citigroup , Banco Santander and Wells Fargo are trying to calculate how much they should pay for a company whose losses may eventually reach $30 billion. The sum may also depend on how many tainted assets Washington Mutual might dump into a government bailout fund, and what price the government or private parties might pay for those assets.
Also unclear is whether the scope of assets to be salvaged by the government will include commercial real estate and credit card loans, on top of troubled home loans and mortgage-related securities.
Washington Mutual faces several pressure points that suggest a deal will need to be carried out soon if the bank — considered one of Wall Street’s weakest links after the failure of Lehman Brothers last week — is to avoid outright collapse. Such a move could cost taxpayers billions more because it would virtually wipe out the federal deposit insurance fund.
The bank, which grew into a behemoth over the last decade through a series of acquisitions that proved its undoing, has seen its name in headlines alongside other troubled giants of the financial world, including Lehman Brothers and American International Group. To attract customer deposits, Washington Mutual has been offering 5 percent for one-year certificates of deposit — exceeding the 4 percent that other weakened banks are offering.
Despite WaMu’s problems, its suitors are eager to gain access to a lucrative consumer base that it has built throughout the country. J. P. Morgan wants to gain a foothold in California, where Washington Mutual has plenty of branches, a move that would further entrench it in key markets like Chicago and New York.
Citigroup is interested in access to a deposit-gathering franchise in several big markets, which would raise its overall number of branches. Banco Santander would expand its presence in the United States. Wells Fargo, already a big player in California, would prevent J. P. Morgan and other potential rivals from encroaching on its territory.
Under its former chief executive Kerry Killinger, the Washington Mutual dove into a particularly risky part of the mortgage business, making option adjustable rate mortgage arm loans to the least creditworthy borrowers, who were permitted to pay only a portion of the principle and interest.
While the new chief executive, Alan Fishman, had more of Wall Street’s confidence, it has become too late to resolve the ailing bank’s problems, analysts said.
Some analysts had even asked whether TPG, formerly Texas Pacific Group, which together with other investors had put $7 billion into WaMu, might add more capital. But that generally seemed unlikely. The group had invested roughly $8.75 a share and was well under water on that investment while the government announced a major overhaul that might take the troubled loans off Washington Mutual’s balance sheet.
Nevertheless, shareholders have a stake in a company that has great appeal to other banks because of its wide depositor base which could provide stable capital to another buyer.