BankUnited’s Takeover Provides Astronomical Returns – but big costs for you and me (the US Taxpayer) |

As we discussed in Parts 1 and 2, it sure looked like BankUnited was a “success” on paper. Its mortgage portfolio (the value of loans the bank held) had escalated from $ 6.1 billion in 2004 to $ 12.5 billion by 2007. (Unfortunately, some 70% of their entire portfolio was based upon Option ARM’s.) A few months later, the value of these Option ARM loans were equal to almost 6 X the entire capital held by the bank. (Capital is the money the bank has on hand to insure against failure; it is not the same thing as the bank’s assets [which would be the loans, in this case]- but if the assets are homes subject to mortgages that exceed their worth, you can see the obvious problems.) By the spring of 2008, 92% of BankUnited’s Option ARM’s were underwater. And in 2009, BankUnited was taken over by the Feds.

The FDIC, as part of their takeover statements, claimed that BankUnited tried to force every customer to sign up for an Option ARM. A class action lawsuit asserted excatly the same facts. (There is ample evidence that the bank’s loan officers were directed to sell an Option ARM to every customer- regardless of their ability to pay said loan back.) The bank founder, Alfred Camner asserted (in some local business journal- I think the South Florida one) that the bank did not force every customer to sign up for the option ARM. (As a mortgage holder, I can tell you in my case they clearly did try- hard.)

Well, as we noted in part 1, this bank failed in a big way. (BankUnited stands to become the second largest bank failure in US history.) The FDIC, after it took over the bank, sold it to a group of investors including folks at Blackstone and Carlysle (big investment houses) for $ 945 million. It was a good deal for these investors, since the FDIC generally agrees to pay 80% of all the loans on the existing portfolio. And, when a bank’s losses exceed $ 4 billion, the FDIC would cover 95% of those additional losses. (We have describe how these “losses” are computed in the video above- which means the investors can get the FDIC to pay for MORE than the entire value of the loan as part of this guarantee. Yes, a profit is made on the guarantee, not a potential loss of even 5%o the bank owners!) As the prospectus for public offering for BankUnited states (24 January 2011), there is little risk in investing in the bank- since the Feds will repay the bank 89.7% of their losses- or some $5.7 billion.

This escapade is compounded by the fact that the stock offering will raise $ 630 million, but the bulk of the funds do NOT go to the bank. Some $ 500 million of the stock proceeds will be provided to Blackstone, Carlysle et. al to repay themselves more than half of their initial purchase price for the bank (the $ 945 million discussed above), with their stock worth (after going public) some $1.5 billion. Not a shabby return. (By the way, only $85 million goes to the bank- the rest ($45 million) goes to the underwriters and promoters!)

(Footnote: The offer was oversubscribed, raising some $ 750 million for the BankUnited stock!)