Sunday, May 1, 2011

Carlyle & Treasury: Funny Business United

The Carlyle Group invested in a series of small banks, all with TARP financing.  The latest is FNB United, a North Carolina bank  Carlyle and Oak Hill will invest $155 million alongside other investors in FNB, which will merge with Bank of Granite.

Carlyle and Oak Hill have each agreed to purchase from FNB, 484,375,000 shares of FNB Common Stock at a price of $0.16 per share, for aggregate cash consideration from each of Carlyle and Oak Hill of $77,500,000 (a total of $155,000,000)

U.S. Treasury owns $51.5 million in FNB preferred stock (liquidation value) and has warrants to buy nearly 3 million shares at $3.50 per share.  TARP will exchange the $51.5 million preferred for $12.9 million in FNB common stock.  That's a $38.6 million federal subsidy (gift of Tier 1 capital) to Carlyle and company.  Treasury will keep the 3 million in warrants with a new exercise price of 16 cents a share.  Those 3 million shares are massively diluted by almost 2 billion new investor shares.

The Feds changed tactics in recapitalizing banks after Carlyle and peers held up BankUnited for $2.3 billion in FDIC cash.  New owners.took BankUnited public a year later, much to the chagrin of citizens paying attention.   It's harder to find government subsidies for private equity underwriters (PEU's) in SEC documents.  Rest assured, they remain.

The Feds accommodated the deal by signing a deferred prosecution agreement with anchor investors (Carlyle and company) regarding FNB's involvement in a customer's Ponzi scheme. The Department of Justice agreement requires FNB:

pay on the Closing Date $400,000 to the District Court for distribution to the victims of the fraud perpetrated by the customer
How did Carlyle spin the deal in their press release?  It referred to the North Carolina market for FNB and Granite as:

located in some of the state's most robust markets
Contrast this with FNB's 10-K risk language:

Overall, during 2009 and 2010, the North Carolina business environment has been adverse for many households and businesses and continues to deteriorate. There can be no assurance that these conditions will improve in the near term.
How are employees faring at FNB?  They had their pension and post retirement medical and life insurance accruals frozen a year earlier than expected.. Employees got a memo regarding the deal, stating employees needed to know Jack:

Please submit any questions using the Service Request feature located on the homepage of Jack.  We plan to respond to questions as soon as we are able to do so.

Carlyle co-founders, known collectively as the DBD's, are multi-billionaires.  They hate to pay taxes and FNB is no exception.  Carlyle sees huge value in FNB's tax benefits from operating loss carry forwards.  The deal banks on their preservation.

Where have Carlyle's founders parked bankshares from prior deals?  The Cayman Islands, specifically DBD Cayman.

DBD Cayman, Ltd had held investments worth $406 million in late 2010.  The Cayman fund has $48 million in Boston Private stock, a TARP beneficiary.  It benefited from IPO's for BankUnited and Nielsen Holdings N.V.  DBD Cayman took a stake in Central Pacific Bank, as well as Hampton Roads Bankshares .  In late 2009 DBD Cayman had holdings of $154 million.  .  
Uncle Sam subsidizes bank deals and preserves tax benefits so PEU's can park the investment in the Cayman Islands?  I smell corporafornication.  But there's more.

FNB paid deal related fees to Sandler O'Neil, a recent Carlyle investment.  How many ways will PEU Carlyle profit from FNB?

America's political system caters to PEU's secretive ilk.  The sins that brought America's financial system to its knees continue unabated.  It's funny business united, centered in Washington, D.C.

Update 5-5-11:  Fortune noted the odd ring to "I'm your PEU Community Banker."  Their story missed the $38.6 million taxpayer subsidy for the deal.

Update 5-23-11:   Carlyle sees significant interest in the deal.

Update 6-18-11:  Carlyle found accredited investors for the FNB-Granite deal

Update 9-30-13:  Carlyle renamed FNB, changing it to CommunityOne.  FNB had a Ponzi scheme in its background.   Now that's funny business.