FDIC’s Poor Track Record in Holdco Bankruptcies
Last week I did a post about how the FDIC as receiver for Silicon Valley Bank probably doesn’t have a claim against SVB Financial Group, the holdco of the bank. I got some pushback on that (including from a former student!), but I’m sticking to my guns here. It’s a result that seems wrong and surprising, but if you look at the three most recent big bank holdco bankruptcies (this takes some digging in old bankruptcy court dockets), the FDIC has ended up with little or no claim.
In IndyMac, the FDIC filed a $5 billion proof of claim based on capital maintenance, fraudulent transfers (primarily dividends), tort claims for breach of fiduciary duty, and alleged ownership of a tax refund that had gone to the holdco. The FDIC alleged that it was all a priority claim. After a few years of litigation, the FDIC settled for an allowed $58 million general unsecured claim…and got a distribution of about $5.6 million.
In WaMu, the FDIC and holdco each had claims against each other. The FDIC was claiming similar things as in IndyMac. The end result was a settlement in which the FDIC dropped its bankruptcy claim entirely and got no payment whatsoever from the holdco, just a release.
And in Colonial Bancorp, the FDIC filed a $1 billion proof of claim, primarily based on capital maintenance obligations…and got nothing. The FDIC lost in the bankruptcy court on whether the capital maintenance obligations were actually an enforceable monetary obligation, and then settled on this and a bunch of other issues while an appeal was pending. As part of the settlement, the FDIC dropped its claim, but got a release. Unlike with IndyMac and WaMu, there was actually something sort of like a capital maintenance agreement, although it wasn’t quite right for creating a claim. I don’t know of any equivalent document for SVB Financial Group, which suggests that the case is even more like WaMu or IndyMac. Maybe the FDIC can maintain a claim for some small fry things like a share of tax refunds, etc., but I don’t see how FDIC will have an allowed claim for anything close to the $2B or so that SVB Financial Group has on deposit at the bank, and if that’s the case, any setoff FDIC might claim will be limited.
Whatever package of reforms we see going forward really ought to ensure that FDIC as receiver can recover against the holdco–that is source of strength doctrine needs to have some teeth, including in bankruptcy. A key way to do that is to mandate single-point-of-entry (SPOE) resolution for all banks, not just the really big ones (G-SIBs).
The rescue of SVB and SBNY depositors seriously undermined whatever market discipline might exist in the deposit market. But there is a way to restore an important level of market discipline to banking: take the model that exists for really big banks—SPOE, which involves bail-in-able holdco debt—and apply it to all banks. That will make holdco level bondholders structurally subordinated to bank-level deposits (and the FDIC). Those holdco-level bondholders are going to be very concerned with monitoring the financial health of the bank. And the credit default swap spreads on the holdco-level bonds will be a very visible indicator to everyone of the market’s evaluation of the bank’s health, basically a market check on regulators’ work.