Bank Activists Get Say on Deal

0
Bank Activists Get Say on Deal
In the Money: OneWest’s Brian Brooks

In the fight between the California Reinvestment Coalition and lenders CIT Group and OneWest Bank, round one went to the coalition, as the group successfully lobbied federal regulators to take the rare step of holding a public hearing this week to decide whether they should allow CIT to buy OneWest.

Round two will likely see the lenders take a few body blows, but not enough to take down their deal.

The Federal Reserve and the Office of the Comptroller of the Currency will hold a public hearing Feb. 26 to review the buyout, which would create L.A.’s biggest bank. But while CIT and OneWest executives should expect to have a lot of their dirty laundry aired, and they might want to prepare themselves to offer concessions to their opponents, they shouldn’t expect regulators to call off the deal, former regulators say.

“It’s kind of like the Fed feels obligated to do this,” said A. Wade Francis, a former OCC bank examiner and now president of bank consulting firm Unicon Financial Services Inc. in Long Beach. “It will be approved.”

But Kevin Stein, the coalition’s associate director, has higher hopes. He pointed out that CIT of Livingston, N.J., and Pasadena’s OneWest have checkered pasts, and the hearing, to be held in downtown Los Angeles, is an opportunity to rehash that history in front of regulators. He’s hoping to leverage that to ensure the proceedings are a grilling, not just a rubber-stamping.

“We’re not content that they’ll just be having this hearing,” Stein said. “We’re hoping that the regulators will establish that they are looking closely at these deals.”

Indy scene

OneWest was constructed out of the wreckage of failed lender IndyMac Bank by a team including hedge fund manager George Soros; computer tycoon Michael Dell; and another hedge funder, Steven Mnuchin, who would become the bank’s chairman. In a crucial part of that deal – which came together during the depths of the financial crisis – the Federal Deposit Insurance Corp. agreed to absorb much of the former thrift’s bad debt under a loss-share agreement that will continue to benefit the merged bank should the deal go through.

Since the loss-share deal was struck, OneWest’s original investors have pulled more than $2 billion in dividends out of the bank, and should make almost that much again through the sale to CIT, which plans to combine OneWest with its CIT Bank unit.

OneWest has also attracted negative attention due to its aggressive tactics in foreclosing on homes. The bank has been forced to pay settlements to several borrowers who suffered financial harm as a result of its practices.

CIT has financial crisis-era baggage of its own. The bank got $2.3 billion from the Troubled Asset Relief Program before going bankrupt, making it one of the few institutions that did not pay back its TARP money. Stein plans to remind regulators of this.

“They’ve both received significant public subsidies,” he said.

CIT has publicly welcomed the hearing, saying in a Feb. 9 Securities and Exchange Commission filing that holding such a session is “an important step in our transaction.” Representatives of the bank pointed the Business Journal to that filing when asked for comment for this report.

OneWest declined to comment for this story, but executives there apparently don’t share CIT’s view.

In fact, OneWest Chief Executive Joseph Otting recently sent an email to many of his Wall Street contacts that included a link that sent a form letter to Federal Reserve Chairwoman Janet Yellen urging her and other regulators to approve the merger without a hearing.

“Thankfully, the regulators weren’t swayed by letters from the business partners of the bank,” Stein said.

Game plan

The Feb. 26 hearing will be the first of its kind since Capital One bought ING Direct in 2011, and Stein plans to use the opportunity to give the public a deeper look at the histories and business practices of both institutions. For instance, he said OneWest has lagged behind industry standards when it comes to lending to Asian- and African-American borrowers.

Still, it will be difficult for the coalition to put forward any findings that will threaten the CIT-OneWest deal.

The hearing will include a review of the banks’ performance under the Community Reinvestment Act, a 1977 law that requires banks to adequately serve lower-income communities. While Stein said OneWest has fallen short in that area, both OneWest and CIT have passed their required CRA evaluations, weakening the coalition’s case.

“The government cannot stop it on CRA grounds if they find the CRA is in compliance,” Francis said. “It would be very difficult for regulators to deny the merger. And if they did, they would have to be saying that other regulators did a bad job.”

Community chest

Walter Mix III, an analyst at Berkeley Research Group in Emeryville and a former commissioner of the California Department of Financial Institutions, said the CRA has effectively created a bargaining opportunity for community groups to extract more concessions from bank mergers of a high enough profile. And since CIT-OneWest is the first such deal in a while that fits that bill, he’s not surprised the coalition has applied a full-court press.

“For the community groups, which frankly aren’t seeing a lot of activity in the space, this type of a merger gives them the opportunity,” he said.

Francis agrees.

“It’s a public outcry,” he said. “All they want to do is get a commitment that the combined bank will provide more services in their communities.”

While he doesn’t think stopping the deal is in the cards, Mix believes the coalition and other groups should, at the very least, be able to extract meaningful concessions for underserved borrowers.

“I would expect to see an increase in commitments to lower-income and moderate-income communities,” he said. “But I think the headline at the end of the day will be that a hearing was held and the merger transaction was approved.”

But Francis isn’t even sure the community groups will get that much.

“That’s entirely up to whether the merged banks want to throw them a bone or not,” he said.

No posts to display