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FDIC sells USD14bn IndyMac Federal to private equity consortium

The Federal Deposit Insurance Corporation has signed a letter of intent to sell the banking operations of Pasadena, California-based IndyMac Federal Bank to a thrift holding company contro

The Federal Deposit Insurance Corporation has signed a letter of intent to sell the banking operations of Pasadena, California-based IndyMac Federal Bank to a thrift holding company controlled by IMB Management Holdings, a partnership including private equity and hedge fund investors. The deal, which is set to close in late January or early February, is valued by the FDIC at USD13.9bn.

‘The current economic climate is challenging for selling assets, but this agreement achieves the goals that were set out by the chairman and board when the FDIC was named conservator of IndyMac in July,’ says FDIC deputy director James Wigand. ‘Unfortunately, IndyMac’s liability structure, combined with aggressive real estate lending in California, had a significant impact on losses.’

Prior to IndyMac’s failure on July 11, the bank relied heavily on higher-cost and less stable brokered deposits, as well as secured borrowings, to fund its operations, and focused on stated income and other aggressively underwritten loans in areas with fast-rising home prices, particularly in California and Florida. Since the FDIC took over operations, it has restructured funding to focus on more stable core deposits and on improving the value of its loans.

IMB Management Holdings and the investor group will inject USD1.3bn in capital into the newly-formed thrift holding company, which will own and operate IndyMac Federal. IMB has agreed to bring in an experienced senior management team to run day-to-day operations.

The group is headed by Steven Mnuchin, who will become chairman and chief executive of the holding company. Mnuchin is chairman of Dune Capital Management, which he founded in 2004 with another former Goldman Sachs executive, Dan Neidich.

The investors also include bank buyout expert Christopher Flowers, head of private equity firm J.C. Flowers, hedge fund manager John Paulson, a private investment firm for computer tycoon Michael Dell, and veteran hedge fund manager George Soros.

Terry Laughlin, who previously headed Merrill Lynch Bank & Trust, will become president and chief executive of the new thrift, which will inherit IndyMac’s 33 branches, mostly in the Los Angeles area, USD6.5bn in deposits and a total of some USD27bn in assets.

‘We have assembled a group of experienced private investors in financial services to acquire the former IndyMac and operate it under new management with extensive banking experience,’ Mnuchin says.

According to the FDIC, the sale of IndyMac to IMB Management is not the first time private equity firms have participated in acquiring failed institutions. In the early 1990s, the FDIC tapped private equity when it sold New Bank of New England and CrossLand Federal Savings Bank.

The corporation says that the streamlined loan modification programme introduced at IndyMac in August has provided total estimated savings of USD423m. The continuation of the programme is a condition for the FDIC to provide any type of loss-sharing on IndyMac’s assets.

‘The FDIC and IndyMac staff accomplished a tremendous amount of work in a short period of time to help thousands of struggling homeowners stay in their homes and maximise value for both the Deposit Insurance Fund and mortgage investors,’ says John Bovenzi, chief executive of IndyMac Federal and FDIC chief operating officer.

It is estimated that the cost to the FDIC’s Deposit Insurance Fund for resolving IndyMac Bank will be between USD8.5bn and USD9.4bn.

‘It is unfortunate that many of the banks that failed last year had a heavy reliance on Federal Home Loan Bank advances,’ Bovenzi said. ‘These secured borrowings and the associated prepayment penalties have the effect of increasing the costs to the FDIC and to uninsured depositors.’

Created in 1933 by the US Congress, the Federal Deposit Insurance Corporation insures deposits at the country’s 8,384 banks and savings associations, and is wholly funded by the industry.

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