"Recent Developments in Private Equity Involvement in FDIC Resolutions"

In a transaction that establishes a new paradigm for FDIC auctions of failed institutions, a consortium of private equity firms consisting of Starwood Capital Group, TPG Capital, Perry Capital and a joint venture betweenWL Ross & Co. and LeFrak Organization recently completed the acquisition of an equity interest in a limited liability company created to hold approximately $4.5 billion in condominium loans and related REO properties of Corus Bank, N.A., which was placed into FDIC receivership in September.

The FDIC is required to achieve the “least cost resolution” of the institution to the FDIC’s Deposit Insurance Fund. For the past year,most failed banks have been auctioned as “Whole Bank with Loss Sharing” transactions, where the acquiror assumes all of the failed bank’s deposits and acquires substantially all of the failed bank’s assets, and the FDIC shares in future losses on the acquired loan portfolio.

In order to participate in a “Whole Bank with Loss Sharing” bid process, however, the bidder is required to either be a bank or be preapproved for a bank charter (a “shelf charter”), which significantly limits the number of bids received by the FDIC. For Corus, the FDIC sought to increase the number of bidders by separately auctioning Corus’ condominium loan portfolio and related REO to bidders of all types, (including private equity funds and hedge funds), while auctioning Corus’ deposit franchise (consisting of 11 branches and approximately $7 billion of deposits, largely brokered CDs) to banks. Even though the asset transaction did not involve FDIC loss-sharing assistance, interacting with the FDIC and navigating the FDIC’s unique auction procedures were critical components of the transaction.

We believe that while “Whole Bank with Loss Sharing” transactions will continue to be prevalent, the FDIC will use the Corus transaction as a model for many future resolutions, particularly where the failed institution’s deposit gathering business has relatively little franchise value and/or is overly reliant on brokered deposits and its assets include a substantial portfolio of commercial real estate assets requiring the expertise of experienced real estate investment firms to maximize value.

The Corus transaction is novel but is only one of several responses to the FDIC’s need to attract private capital and management to absorb the growing inventory of ailing institutions that must be resolved over the next several years.

Skadden represented the private equity consortium in the Corus transaction. We also have taken a leading role in other significant private equity transactions in the banking sector in 2009, including its representation of:

• Aconsortium of private equity firms, including The Blackstone Group, The CarlyleGroup,WLRoss&Co., Centerbridge Capital Partners, and a management team led by John Kanas, in the organization of a new thrift institution and its acquisition via auction of the banking operations of BankUnited, FSB fromthe FDIC, as receiver, in a “Whole Bank with Loss Sharing” transaction. This is one of the first transactions in which private equity firms sought and obtained a shelf charter in connection with a successful bid to the FDIC. We also have assisted other clients in successfully obtaining shelf charters and have several applications pending with the banking agencies.

• Fortress Investment Group LLC, Crestview Partners and Lightyear Capital in connection with their proposed investments in First Southern Bancorp, Inc. This transaction is a so-called “inflatable charter” transaction, in which the investors would make separate non-controlling investments in an existing, smaller depository institution to use as a platform for bidding on FDIC transactions.

These and other transactions on which we are working pose several complex transactional and policy issues, including with respect to:

• the governance arrangements among the consortium members in light of regulatory limitations;

• subsequent financing arrangements for follow-on acquisitions;

• in “inflatable charter” transactions, the existence of legacy shareholders, and related majority/minority issues and risk allocation on the bank’s legacy assets;

• the terms of the FDIC’s loss sharing arrangements;

• accounting matters; and

• the FDIC’s policy statement on eligibility to acquire failed institutions and related issues.

While private equity consortia have found it more challenging to organize as owners of banks than in the case of thrift ownership, we are confident that this approach to financing the acquisition of failed institutions makes sound economic and policy sense and will prevail. We expect that the Federal Reserve will conclude its internal policy review regarding private equity in a manner that will be accommodating to concentrated private equity consortia.

We also are involved with several transactions in which experienced bank management teams are accessing the institutional capital markets to raise funds (including on a “blind” basis) for purposes of pursuing failed bank acquisitions. These transactions seek to strike the balance between the need to have capital in place prior to the time a target is identified and concerns in some quarters that more concentrated consortia where multiple private equity firms own in excess of 10% of the resulting institution may not receive timely Federal Reserve approval.

Many more institutions are expected to close, and the pace of closures is likely to pick up considerably in the coming months. The opportunity to contribute to the resolution of the FDIC’s troubled institutions will take a variety of forms, but in every case will favor those investors aligned with experienced bank or real estate managers and prepared at the earliest possible date to meet the regulatory and economic requirements for the particular approach they choose.