Manatt, Phelps & Phillip's Hal Reichwald

WASHINGTON, DC—If nothing else, the Federal Deposit Insurance Corp. must get kudos for its creativity in stretching its resources to handle the huge influx of failed banks and their assets over the past two years.

Among other approaches, it is providing assistance to investors that wish to acquire these banks through price discounts and warrant sales. Examples include TD Bank of Canada, which announced it would buy the South Financial Group. Thomas H. Lee Partners took a minority stake in Sterling Financial for $134.7 million. Then there was Gerald J. Ford, who paid $500 million for a 91% stake in Pacific Capital Bancorp, based in Santa Barbara.

Investor demand, though, is not limitless for such deals—even with the assistance. Perhaps most notably, the number of troubled banks is growing. The FDIC recently said that 775 institutions, most of which are community banks, were on its list of banks to watch, as of March 31, up from 702 at year-end.

The FDIC, it is becoming clear, must reach into its toolkit again for additional solutions, which is where Hal Reichwald, co-chair of national law firm Manatt, Phelps & Phillips, LLP’s Banking and Specialty Finance Practice Group enters the debate. He is pushing for the FDIC to allow troubled banks to form JVs with real estate capital—JVs that would be seeded with the troubled real estate loans and properties of the failed banks.

“We have been through tremendous amount of financial distress and the continued devaluation of real estate market. Given the prospects for a slow recovery it becomes more and more necessary for these banks to earn their way out of their problems one way or another.”

GlobeSt.com: Can you tell me what is the government policy right now towards such JVs?

Reichwald: There have been lots of discussions with regulators, but they are not embracing the concept.

GlobeSt.com: Do they give a reason?

Reichwald: I think historically regulators fear that real estate capital is too opportunistic and might seek a quick return to the disadvantage of the bank. Regulatory agencies insist that banks raise capital—but some don’t have ability to raise capital from traditional sources and have been seeking private equity infusions, such as Thomas H. Lee Partners’ minority stake in Sterling Financial. But the real problems are in real estate portfolios in banks. We believe regulators should be open to a variety of possibilities to permit private equity to assist in the recapitalization of a bank.

GlobeSt.com: What made you think you could pursue such a path with the FDIC?

Reichwald: When Corus Bank failed in September 2009 the FDIC to split the bank’s assets in its core banking franchise, which was sold eventually to MB Financial Bank, and its real estate loan portfolio. That got sold to a consortium of real estate investors led by Starwood Financial and TPG. That ‘split approach’ suggests that banking regulators might be open to the possibility of private equity and real estate capital working together.

GlobeSt.com: What would be the upside for FDIC, or the ultimately, the taxpayer?

Reichwald: The risk of property devaluation is with the real estate players. Also as we know there are players on the sidelines that have capital available and can likely produce a better return.

GlobeSt.com: Do you think there is a possibility these structures will be introduced or allowed at some point?

Reichwald: We are lobbying for it and pushing our clients to encourage the FDIC. With the number of troubled banks growing, there needs to be more solutions.