BankUnited Fails in Year's Biggest Bust

By DAMIAN PALETTA and JOE BEL BRUNO Federal regulators seized Florida's BankUnited FSB on Thursday, the biggest bank failure this year, one that the Federal Deposit Insurance Corp. estimates will cost its weakened insurance fund $4.9 billion. BankUnited, which was owned by holding company BankUnited Financial Corp., is the second-costliest bank failure of the financial crisis, trumped only by IndyMac Bank, which failed in July at an estimated cost to the FDIC of about $11 billion. Banks That Went Bust Review the details on the banks that have been shut down by federal regulators since the start of 2008. Real Time Econ: Inside Fed's Balance Sheet BankUnited's failure is a stark reminder of how fragile many banks in the country remain. The U.S.'s 19 biggest banks this month performed better than expected on government "stress tests" and several large and midsize banks in recent weeks have successfully raised capital through public stock offerings. Government officials say they are still concerned, though, about dozens of banks across the country that made bad bets on real estate, and these troubles will likely continue to ripple through the financial system. The FDIC sold the company's banking operations to a private-equity team headed by John Kanas, the former head of North Fork Bank. The bank's 85 branches will reopen Friday during normal business hours under the same name. The sale protected depositors. BankUnited had $12.8 billion of assets and $8.6 billion in deposits, and regulators said it was critically undercapitalized. Mr. Kanas's team agreed to pump $900 million in new capital into the bank and to acquire $12.7 billion of the bank's assets and $8.3 billion of certain deposits that are considered less risky. The FDIC agreed to absorb most future losses on a $10.7 billion pool of assets that the investment team will manage. BankUnited's collapse puts further strain on the FDIC's deposit-insurance fund, which guarantees most deposits against the risk of a bank failing. BankUnited is the 34th bank to fail this year, after 25 went under last year. A BankUnited spokeswoman referred questions to the FDIC. The FDIC said the investment group's acquisition of BankUnited was the "least costly" resolution for the deposit insurance fund. View Full Image Associated Press Linda F. Beavers, regional ombudsman with the FDIC, puts a up a press release at the headquarters of BankUnited on Thursday in Coral Gables, Fla. Mr. Kanas, 62 years old, said the strategy for the company will be to use it as a launching pad for more deals in Florida as the economy begins to rebound. He said the private-equity consortium wouldn't have bought BankUnited without some kind of government guarantees. The FDIC's deposit insurance fund had just $19 billion at the end of 2008 to backstop trillions of dollars in deposits. To replenish the fund, the agency is scheduled to vote Friday on a controversial plan to assess a special one-time fee against more than 8,000 banks. President Barack Obama signed a bill into law Wednesday that allows the FDIC to borrow as much as $100 billion from the Treasury Department to shore up its fund, a measure the FDIC had sought for months. BankUnited, based in Coral Gables, is a high-profile casualty of the banking crisis. Its problems stemmed largely from its forays into risky housing loans. The bank, founded in 1984, specialized in an exotic type of mortgage made to people living outside the U.S. who wanted to buy property in Florida. As of June 30, 2008, BankUnited was holding about $1.4 billion of these so-called "nonresident alien" mortgages, representing 11.4% of the bank's total loan portfolio. Some investors questioned BankUnited's emphasis on such loans, which primarily went to people in Latin America who wanted a Florida home for vacation or investment purposes. Skeptics argued the loans were riskier than mortgages to U.S. residents because the loans didn't finance borrowers' primary residences. When the Florida real-estate market eroded, some borrowers became delinquent or defaulted on their loans. John Kanas BankUnited holds about 2.1% of deposits in Florida, according to the latest figures, a state hit hard by a real-estate collapse. That ranks it eighth among all financial institutions in the state. The private-equity consortium buying the bank includes W.L. Ross, Blackstone Group, Carlyle Group and Centerbridge Partners. The sale represents one of the largest private-equity investments into banks since the financial crisis began two years ago. It's the first bank investment for Blackstone, the New York private-equity giant led by Stephen Schwarzman. The new owners hope to use BankUnited as an acquisition vehicle when other Florida-based banks go under, according to a person familiar with the group's thinking. As BankUnited struggled, it caused problems for the federal government. In March, the Treasury Department placed the acting head of the Office of Thrift Supervision on leave amid allegations the agency allowed BankUnited to improperly report its financial condition as healthier than it was. The Treasury is still investigating the issue. Many people have called for the government to abolish the OTS because of its supervision of several banks that have failed in the past year, including Washington Mutual, IndyMac and Downey Savings & Loan. When word recently leaked that Mr. Kanas and other investors were contemplating investing in BankUnited, markets cheered the news as a long-awaited sign investors were starting to tiptoe back into the beleaguered industry. But investors were willing to pump money into BankUnited only after regulators seized it and agreed to protect investors against most losses on the bank's troubled loans. That doesn't bode well for other troubled banks looking to lure outside capital. Regulators told BankUnited in April it needed to raise capital or sell itself to avoid being seized. The FDIC shopped the thrift to a host of potential bidders over the past few weeks people familiar with the matter said. Though BankUnited is the largest financial institution based in Florida, the FDIC didn't receive the kind of interest it had hoped for. There were only two bidders that emerged, including Mr. Kanas's group, those people said. The FDIC has tried to head off potential confusion among customers in Florida, running public-service advertisements in both English and Spanish that explain how deposit insurance works. "We'll have staff at all the branches so that customers will understand it will be business as usual tomorrow," FDIC spokesman Andrew Gray said. —Peter Lattman and David Enrich contributed to this article. Write to Damian Paletta at damian.paletta@wsj.com