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Transformational acquisitions are often a tough sell on Wall Street, particularly when the assets purchased are of dubious quality.
The morning after UBS revealed it was buying Credit Suisse and absorbing its $581 billion balance sheet for the paltry sum of $3.3 billion, for example, shares in the Zürich lender fell as much as 16% in the session. Investors feared integrating an arch-rival and one of the 30 systemically important global banks might prove too formidable a challenge.
Yet when the market found out on Sunday that First Citizens boss Frank Holding bought from the Federal Deposit Insurance Corporation (FDIC) the bulk of insolvent peer Silicon Valley Bank, doubling his asset base in the process, something truly remarkable happened the next day.
Shares in his company skyrocketed. First Citizens closed 54% higher on the session and, more importantly, it has since gone on to trade at a record high—counterintuitively in the middle of a crisis affecting regional banks the most. The judgement from investors couldn’t be clearer: Holding scored an absolute coup for the Raleigh, N.C.-based lender.
FDIC chair Martin Gruenberg now has had to answer to Congress after lawmakers effectively accused his institution of leaving a pot of money on the table, money he will now have to raise through a special levy exacted on all commercial banks across the country.
All of SVB’s underwater securities remain with FDIC
Asked on Wednesday to explain his rationale, the FDIC chair testified that of the 18 different parties bidding for SVB assets, the First Citizens offer constituted the best deal on the table for a couple of reasons.
“Financially it was the strongest bid for the FDIC,” Gruenberg testified in a hearing of the House financial services committee. “And two, it was a bid for all the deposits of the institution and all of the loans of the institution, so that it provided operational certainty as well.”
He let First Citizens acquire revenue-generating assets worth $110 billion against liabilities it agreed to assume of only $93.6 billion. That difference adds nearly $16.5 billion in loss-absorbing equity that bolsters First Citizens’ regulatory capital.
In the process, management asserted in a call to investors it would not be required under the terms of the deal to assume any of the underwater ‘held-to-maturity’ securities estimated to be worth $15.1 billion less than their carrying value on SVB’s books according to the bank’s own 2022 annual filing.
As a result, the FDIC said its Deposit Insurance Fund will likely have to eat an estimated loss of $20 billion in the process.
By law it is now required to drum up the cash from its member banks—much to the chagrin of elected officials worried their community lenders will pay the price for SVB’s shocking mismanagement. (Gruenberg told Congress his government agency has the discretionary authority to make larger lenders pay a disproportionately higher contribution into the DIF and pledged to take their concerns into consideration)
A spokesperson for FDIC declined to add to Gruenberg’s comments during the hearing, while First Citizens did not respond to a request from Fortune for comment.
First Citizens has scooped up a number of troubled banks from the FDIC
This is not the first time the FDIC chair has crossed swords with Holding’s management team either.
“First Citizens has completed more FDIC transactions than almost any bank since 2009,” the chairman and CEO told his investors during a Monday conference call, hailing the acquisition as “momentous” in scale and “compelling financially, strategically and operationally”.
It seems Holding is getting better and better at securing terms most favorable to his bank’s shareholders.
As far as the government is concerned, testimony from Gruenberg and Fed vice-chair Michael Barr, as well as comments from Treasury secretary Janet Yellen, reveal that the primary focus of U.S. financial authorities was a swift resolution to the SVB crisis they feared would spark contagion and undermine broader confidence in the country’s banks.
An earlier takeover of SVB would have been preferable, Gruenberg conceded, but given the compressed time to properly conduct due diligence, the only bid offered in the initial weekend after the lender was seized on March 10 was more expensive than a liquidation. As a result, the choice was made to extend the process, leading to the 18 parties that put forth concrete bids.
“It was a negotiation, Congressman, and that’s what we were able to work out,” Gruenberg told Congress, in an attempt to explain why he couldn’t extract more favorable terms from First Citizens.
Asked by Rep. John Rose of Tennessee whether he thought he did a good job negotiating, the FDIC chair allowed himself a chuckle.
“Maybe we could have been better,” he replied. “I don’t know.”
