Chrystia Freeland, US managing editor, interviewed John Kanas, chief executive and chairman of BankUnited about acquiring the bank with FDIC support, working with private equity in the banking sector, the state of the economy and regulatory reform. This is a transcript of that interview.
Part 1: On the FDIC and private equity
FT: Thank you for joining us, Mr Kanas.
JK: Nice to see you.
FT: Your acquisition of BankUnited was one of the important signals of maybe the beginning of a turnaround in the banking sector; how is it working?
JK: It’s actually going a little bit better than we expected it to. We entered the transaction assuming that the real estate market in Florida was going to continue to lag – it is. And we made our bid to the FDIC making the same assumptions, and so that’s worked out quite well. We’ve been spending a fair amount of time reorganising the institution, as you can imagine, but we’re very, very pleased with it so far; it’s going well.
FT: Part of the plan was to use BankUnited as a platform for rolling up other regional banks; are you planning to do that, and do you have any targets in mind?
JK: We’re in touch with the regulators on a regular basis. We’re one of the vendors, if you will, in the world of bank acquisitions, as are many others; so we’re always looking at a number of institutions; we probably have six institutions that we’re doing some form of due diligence on right now – mostly in the state of Florida; some in contiguous states. So yes, we’ve now been in this four months; we’ve got ourselves well enough organised operationally; we’ve filled the senior management roles in the bank that we needed to fill, and we’re ready to get serious about taking a look at other institutions that might be add-ons to BankUnited. But it’s a lot of work, and it’s taking a lot of time, and as you read, the FDIC is grinding through the process of closing the institutions that need to be closed, so we’re on the looking end of that process.
FT: Would these acquisitions be as part of an FDIC process?
JK: Most likely. We have looked at a couple of well banks that are potential deals without FDIC help, but frankly, we’re concentrating 90 per cent on institutions that inevitably will fail, will fall into the hands of the federal government, and there may be an opportunity to do an acquisition similar to BankUnited, with some sort of sharing of the losses on those credits going forward.
FT: The FDIC has been a little bit leery of too much private equity involvement in the banking sector. Is that what you’ve termed ‘paranoia’; is that justified?
JK: I think in some cases it is. Private equity as an industry hasn’t always distinguished itself in the eyes of regulators, in the eyes of the public; and I think some of them have not behaved the way regulators would like to see people behave in a regulated industry like the banking sector. So, I think that the FDIC and the other chartering agencies are well advised to think carefully about the structure within which they’d like to contain private equity in the banking sector. Having said that, however, there is a place under proper regulation for private equity, and I think that both sides, as time goes by, will get more comfortable with each other; private equity, in dealing with such a heavily regulated space, and the regulators in dealing with private equity, as some of these transactions become successful and their worst fears have not materialised.
FT: Since your acquisition of BankUnited, the FDIC has changed and formalised its rules on private equity investment in banking; has that altered your plans in any way?
JK: No, we are a strategic bank now, a bank holding company; we don’t expect that we’d be subject to the new regulations since we are a bank holding company already.
FT: So, you can kind of sneak in there?
JK: Yes, right; we are a strategic bank, we’re run by a bank management team; we happen to be owned by fewer shareholders than most public banks, but I believe that we will escape the most onerous – or I’m hopeful that we’ll escape the onerous parts of that regulation. Having said that, however, if we weren’t able to escape them, they’re not so bad, and I think they’re quite reasonable. A 10 per cent capital requirement, while it’s, in my view, too high, it’s not out of the question, and it does not necessarily stand in the way of our bidding on other transactions, even if we were held to that new standard.
FT: Are you pleased to have got in before those standards were set; do you think that gives a first mover advantage?
JK: Yes. Part of our strategy going back, frankly, into last year, when I began to organise the investor group and talk to them about this strategy, was to be the first in, or at least close to the first in. IndyMac was really the first transaction of this type. And I think it was important to get in early, for two reasons. One, nobody else wanted to deal with this; it was a complex set of circumstances leading to the bid, and it was a time when strategic bidders were busy trying to stay in business and keep themselves afloat in their own businesses. And it was early for other private equity investors to coalesce around an idea like this, because it was unusual to put together decent management people with strong private equity managers who could all come together and agree on something as complex as this. So, yes, I think it gave us significant strategic advantage to be in early; it certainly looks like it’s proving out that way.
FT: You were already thinking about this, getting started on this, before the Lehman bankruptcy?
JK: Yes, I had spent about 18 months looking; after I sold the company that I helped to build for the last 35 years; I had spent a fair amount of time meeting with potential bank investors, and meeting with banks that wanted to get sold or recapitalised, around the country. So, it was a crash course in what was about to happen, and that served me very well. I made a lot of contacts with private equity investors, and I got a unique view of what was really going on in the banking sector from having done due diligence on so many organisations; probably looked at nearly 100 organisations in 18 months.
FT: What was your view then, on what was going on in the banking sector?
JK: Don’t buy a bank without a federal guarantee. My view was that most of the management teams who came in and were hoping to get recapitalised, were being a bit naïve about the situations they were in.
FT: Hoping to get recapitalised by the markets?
JK: By the markets, right, privately. And as time has gone by, a lot of those banks, unfortunately, have found themselves in a more weakened situation; some have actually been taken over already. BankUnited was a good example. I spoke with BankUnited probably a year, a year and a half before we actually succeeded in the transaction, and at that time they were seeking privately from the market two or three hundred million dollars worth of capital, which they thought was going to solve their problems at the time. As it turns out, the FDIC’s estimate of loss in BankUnited is approaching $5bn, so there was a big gap between what bank managers were hoping would happen, and what really ended up happening.
FT: What accounts for that gap?
JK: We’re all basically optimistic and think our children are the most beautiful in the neighbourhood, and I think when things get this bad, this fast, and you’re an inside manager, it is almost humanly impossible to grasp the trouble that you’re in. It happened so dramatically and so quickly, and it was hard to wrap one’s head around how difficult the problems were. The people that I spoke to just found it very difficult to assume it would stay this bad this long and there wouldn’t be an earlier and stronger recovery, which of course we have not seen.
Part 2: On BankUnited and the economy
FT: Are we going to see a lot more deals like the one you’ve done with BankUnited; is this going to be one of the big opportunities that emerges from this crisis?
JK: Yes, well I’m on the record as having said that I think there’ll be somewhere between 800 and 1,000 banks that will cease to exist over the balance of this cycle. Many of those will be, in my view, taken over by the FDIC and restructured in some way or another. I know that the FDIC is thinking about similar structures to the BankUnited deal; I think in the end they will do some just like they did BankUnited; in the end they’ll do some like they recently did Corus, where the deposits were sold off to a local institution, and the assets in that case were heavily weighted toward condominium assets, were sold off to people who were much more able to value those assets. I think there has been, or is about to be, a recent announcement about the Corus assets going to people who are really real estate people, and not banking people. So, I think the FDIC is experimenting with a number of different ways to handle this issue. I think they’re being very realistic about it, and quite creative. And so the short answer is, yes, there’ll be more BankUniteds, but I think we’ll see other forms of restructuring coming out of this debacle as well.
FT: You’re a lifetime banker; you’re working with private equity; what’s that relationship like?
JK: It’s been interesting; it’s actually been not as difficult as most people think.
FT: Do you mean they’re not as bad as their reputation?
JK: Well, my partners have been excellent to work with, but I think that’s fortuitous. I had the luxury of handpicking the people that I wanted, and because I could do that, I picked people who I knew, and my career path had intersected with all of those people in one way or another over the years. So there was already an element of trust, a bond, if you will, between them and the management team, and that made for a very comfortable relationship. I think it’s unique in many ways. I’m not sure that there are a lot of other opportunities to do that between a management team and a private equity group, but in this case, it’s gone very well. I think both sides are very happy.
FT: What are the main things you’ve done at BankUnited?
JK: Well, we had to rebuild the entire senior management team, so as one can imagine, we’ve brought in a senior risk officer, we’ve brought in a new head of commercial lending; we’ve brought in a new chief counsel, we brought in a new CFO. Obviously I’ve replaced the old CEO, so with one exception in the direct report line, directly to me in the bank, all of those positions have been filled from the outside, so we’ve had to rebuild the team now. Because of my experience in the business, I know a lot of people, and so with only one exception, the management team that I’ve been able to put together are people that I know well, and whose experience speaks for themselves, so that’s been pretty easy.
FT: And it’s presumably quite easy to hire bankers at the moment?
JK: Yes, it is. We have actually had to hire people just to review resumes, because as you can imagine, especially in the southeast, there are lots of bankers that are stuck in organisations that for one reason or another are mired down, either by regulatory mandate or because of the market, and so they’re not able to do business, and people are looking for an opportunity where they can go to work for a bank that’s, A, overcapitalised; B, wants to go out and do business, and, C, has the ability to grow through the introduction of more capital. And, D, and probably most importantly, doesn’t have a boatload full of bad assets that they have to worry about going bad. So we have a very unique situation that we can offer to people, and our folks say that the resumes coming over the transom every day, and that gives us a big advantage – it’s very helpful to us.
FT: Through the prism of BankUnited, what is your view of the state of the Florida economy right now?
JK: We see some glimmers of hope in the single family residential market, but it is certainly not robust. I think it’s fair to say that the downward trend, the velocity of the downward trend has lessened, and it’s spotty in some markets in Florida; it’s stabilised. I’m not sure that there are any markets where we’ve actually seen an appreciation or an absolute level of levelling off yet, but there is some hope. On the commercial side, I fear we have a way to go. Commercial markets, commercial properties in Florida are badly weakened, and for the most part, I think the worst part of that problem in Florida, and by the way, in most of the United States, is ahead of us.
Part 3: On regulation
FT: Is regulatory change the answer?
JK: Politically, regulatory change is inevitable, because we have to blame someone, and we have to do something tangible to try to fix it. But to be frank with you, there are already enough regulations in force surrounding this whole process, that had they been properly executed, we probably could have avoided much of this crisis.
FT: So, you don’t need new rules, you just need better policemen?
JK: We need not only better policemen, we need a stronger stomach; we need to have the political wherewithal really to enforce the rules that we already have. Now, there are some exceptions to that, and we need some new rules. The simplest things; if mortgage brokers didn’t walk away from a closing with a $10,000 cheque the day they made the loan, and instead had to wait three years until the loan matured before they saw their commission, we probably could have stopped this at the very bottom of the pyramid, but that wasn’t to be. So, there are some things I think that we very clearly can do.
FT: And should that sort of thing be legislated?
JK: Absolutely; those are very commonsense things that have to do with greed and incentives and we can see those things from a mile away. Unfortunately, we will probably load this room and four other buildings like this, with more regulation that’ll be excessive, that will make it more difficult to do business. It’ll clearly make it more difficult to borrow money – maybe that’s good, but it will probably have more of a negative impact than have a positive result on the process.
FT: What about capital requirements; should those be raised?
JK: Absolutely. I’m a big believer in the whole issue of too big to fail. I think what we really mean is too big to manage; too big to regulate, and certainly too big to analyse, because these institutions have got so complex that, while it’s easier to take shots at the CEOs who went down in flames as part of this dilemma, I’m not sure there are human beings living who could understand the risks embedded in the size of some of these companies today. So, I think it is absolutely appropriate that we start thinking about higher capital levels for larger and more complex organisations where the risks are more difficult to define. Having said that, however, those are the institutions that generally have the lower capital levels today, and we’re a long way from being able to impose higher standards on those banks. But if we think about that logically, if we make it more difficult for these institutions to become too big to fail, if we penalise them in one way or another by holding them to higher standards, then some of these organisations would stay smaller, and we’ve proven that that’s not such a bad thing.
FT: What about Glass-Steagall; was it a mistake to repeal it?
JK: I think it was; I said it was at the time; I was a lone voice in the wind, and I think it was done for political reasons, to accommodate, frankly, the Citibank transaction, and I think we’re living to regret it.
FT: Should we bring it back?
JK: Yes, I think we should, but it’s not possible. Under these circumstances it would be too punishing on the financial stability of the system to bring it back today, but I think congress would be well advised to think about some of the reasons why Glastiegel was brought into effect in the first place, and think about finding ways to plug those holes in the future.
FT: More broadly, what is your view on prospects for the US economy?
JK: Understanding the new role that government has taken, which is something that none of us ever expected to see, I worry that so much of our future is now in the hands of government and politicians. The private sector has clearly been washed away in this, and the impact of the private sector is far less than it was before the government had to step in and plug all the holes. So, my view is that I’m reticent to trust that the political agendas that got us into this problem in the first place, are now we’re all looking for the resolution for the problems in the future. So, I’m hopeful, but somewhat realistic, and maybe even a little pessimistic that we’ll be able to handle this as well as we think in the next couple of years.
FT: Do you see, in business, any winners emerging?
JK: The lawyers. You know the Machiavellian phrase. Listen, out of every debacle comes some winners, and certainly there’s going to be billions of dollars made in fees for people whose job it is to put this mess back together again, and only half kidding about lawyers, but certainly Wall Street will join in that, the law practices will join in that, accounting practices are doing very, very well now, having to unravel this mess. Also, in the face of more regulation, in the face of more accounting regulation and more legal regulation over the industry, I think that the service providers have got a good pension ahead of them.
FT: Thank you very much for joining us, Mr Kanas.
JK: I had fun, thank you.
LONG / SHORT
FT: Okay, now we’re going to play long-short, Mr Kanas, are you ready?
JK: I’m ready.
FT: Goldman Sachs?
FT: Florida residential real estate?
FT: US interest rates?
JK: Low rates for a prolonged period of time, but then a wave, this wave of liquidity eventually hitting, and I worry about very high interest rates in the intermediate future.
FT: What’s the date on that flip?
JK: Five years up.
FT: Tim Geithner?
FT: Sheila Bair?
JK: Very long.
FT: Bank of America?
FT: John Thain?
FT: California residential real estate?
FT: US dollar?
FT: Thank you very much.
JK: Nice to see you.
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