BB&T-Colonial Deal Illustrates It's the Big Bank Chiefs Who Win Again

Colonial BancGroup’s (CNB) quick fire-sale to regional North Carolina bank BB&T (BBT) offers an indication that the U.S. economy may be slowly recovering. But that’s small consolation to the large number of speculators who piled into the lender’s worthless penny shares in recent weeks, hoping for a non-bankruptcy ending to the tale.

When BB&T announced Friday that it had brokered a deal with the Federal Deposit Insurance Corporation to buy $22 billion of Colonial BancGroup’s assets, including deposits and branches, investors cheered the news by heavily buying the former’s shares. Friday, BB&T ended up roughly 10 percent on the day, helping the firm to issue a $750 million stock offering Monday to pay for the deal.

Investors in Colonial didn’t get so lucky. Instead, they find themselves waiting on news of what portion of a Colonial BancGroup Holding Company they are likely to receive. Given that the juiciest parts of Colonial have already been snapped up by BB&T, shares in the holding company are likely to be worth a lot less than the 44 cents a share the entire bank was trading for before it was halted on Thursday.

The example illustrates some prescient points about how this recovery is taking shape. It is true that there are still a number of beaten-down financial institutions in play with reasonable chances of surviving, such as CIT Group, which announced this morning that it got just the number of tendered bonds it needed to avert bankruptcy. Indeed, there are a number investors who view the chances of investing in banks and lenders at fire-sale prices as a “lifetime opportunity.”

But the fact remains: it is far more likely that those institutions which are not still beholden to the government (BB&T paid back its TARP loans in May), or which have the implicit support of the federal government, will succeed right now than those that are hoping to ride the coattails of the recovering economy.

In the case of BB&T, it was the FDIC which emboldened the bank’s position. By entering into a loss-sharing agreement on Colonial’s assets with BB&T, the FDIC has , in effect, created a maximum downside for the bank of $1.5 billion — and even that is probably impossible to achieve.

It’s tempting to speculate on small, cheap banks doing a David and Goliath on the system. At the end of this cycle however, the result is likely to be fewer, bigger banks. The real beneficiaries of that scenario will not be financial stock speculators, but the big bank chiefs and the anti-trust lawyers who pursue them.

Comments

[Constructio...:]

Did BB&T also win by being forced to pay millions in interest for money it never wanted? BB&T and every other well-run bank is still getting the opportunity to subsidize the poorly-run Citi and BofA. Pick the right target next time.

Aug 17 05:27 PM

[Big Al45:]

What are the details of the loss sharing agreement with the FDIC regarding CNB's assets?? This should information should be disclosed in the prospectus for BBT's secondary offering, but, somehow I doubt that it will be.

The $15 Billion in CNB "assets" covered by the loss share agreement are probably worth $8 Billion, at most. So, how much of the $7 Billion loss will BB&T shareholders have to take?

I imagine BBT's share of the loss will be a whole lot more than the 750 million BBT is raising though this secondary offering.

This deal has a certain stench do it - like the BOA - Merrill shotgun marriage. Did Sheila pull a Paulson and threaten to fire King?

Aug 17 06:38 PM

[minddetox:]

I like your perspective. Your speculation is correct.
Thank you,
Brooke

Aug 18 12:22 AM

[Michael Terry:]

As Colonial Bank was the lions share of assets of BankGroup, Colonial BankGroup will ultimately file for bankruptcy (see WaMu for the playbook). Equity = $0. The loss share is interesting as 80% of the losses are eaten by the FDIC (read the US Taxpayer) up to $5B and 95% of the losses are eaten by the FDIC on the next $10B. BBT's share of the loss is estimated at less than $500MM, this deal will be accretive. The conditions being placed on BB&T for mortgage mods are more interesting. Dance with the devil and so on.

Aug 19 12:08 PM