Fed traded fast merger for 2023 private equity rescue

• Key insight: Recent comments by a prominent banking lawyer show that the Federal Reserve sped up the approval of a M&A deal that was unrelated to the 2023 regional banking crisis in an effort to find a private-sector solution as PacWest Bancorp was teetering.
• What’s at stake: The new details about what happened behind the scenes in May 2023 could revive the debate about the Fed’s appropriate role during a crisis.
• Expert quote: “The Fed as dealmaker is not healthy for the economy. That’s not a role the Fed is supposed to have.” — J.W. Verrett, George Mason University’s Antonin Scalia Law School 

When Silicon Valley Bank and Signature Bank went belly-up over a three-day span in March 2023, the U.S. government intervened to limit the damage, promising uninsured depositors they’d be made whole, among other actions.

Seven weeks later, when First Republic Bank became the next domino to fall, the government again played a key role in limiting the contagion risk. JPMorganChase agreed to buy substantially all of First Republic’s assets, but the Federal Deposit Insurance Corp. promised to provide 80% loss coverage on both commercial loans and single-family mortgages.

By contrast, the resolution of PacWest Bancorp — a fourth regional bank that was teetering amid rapid deposit flight in 2023 — appeared to be a wholly private-sector rescue.

Under a complex deal announced that July, PacWest was sold to Banc of California, with funds managed by the private equity firms Warburg Pincus and Centerbridge Partners injecting a combined $400 million of fresh capital and taking stakes in the combined company. 

But previously unreported comments by a prominent banking lawyer show that the Federal Reserve played a behind-the-scenes role in facilitating the sale of PacWest — and that it provided an enticement to private-equity interests to make a deal happen.

The lawyer, Randall Guynn, made the remarks during a panel discussion at a St. Louis Fed-hosted community banking research conference in October. During the discussion, which is available in a video posted to YouTube, Guynn shared an anecdote about a private conversation he had with the Fed’s top lawyer in early May 2023, around the time that First Republic went down, and as PacWest was spiraling.

Guynn is currently an advisor to Fed Vice Chair of Supervision Michelle Bowman, but in 2023 he was a partner at the well-connected law firm Davis Polk & Wardwell. At the time, he was representing the retirement giant TIAA as it was selling its banking unit, which is now known as EverBank, to private equity funds.

Several private-equity firms — including Warburg Pincus, whose then-president was former Treasury Secretary Timothy Geithner — were seeking to take stakes in TIAA’s bank.

TIAA had announced the deal to sell its $38.6 billion-asset bank in November 2022, months before the regional banking crisis erupted. At the time, TIAA was vague about when the transaction would likely be completed, saying only that it expected the sale to close sometime in 2023.

More than five months later, Guynn was not optimistic about the likelihood of getting the necessary regulatory approvals quickly.

He recalled telling one of his M&A partners in May 2023, “Look, I really don’t think we can get approval until the end of the year.”

“And in my mind, I was thinking to myself, ‘I hope it’s before the end of the year, it’s not sometime early 2024. I really have no idea. These things can take forever,'” Guynn said at the conference in St. Louis.

During the Biden administration, bank regulators were approving bank M&A deals at a slower pace than they have since the start of the second Trump administration. But Guynn attributed his pessimism about the approval timeline to another factor: the fact that the buyers were private-equity funds.

Private equity firms aren’t supervised by bank regulators, and under bank regulations, they cannot have control of a bank. The TIAA bank sale involved five PE firms, none of which were taking a controlling interest.

“The buy-side were a bunch of private equity funds, which makes it really complicated. Those take forever,” Guynn said.

One day after Guynn shared his pessimistic outlook about the TIAA deal’s likely timeline, he said, he got a phone call from Mark Van Der Weide, the general counsel of the Fed’s Board of Governors, regarding the regulators’ review of the TIAA bank sale.

“And he said, ‘We’re ready to approve the transaction tomorrow.’ And I about fell off my chair,” Guynn recalled.

“What happened here? Well, what had happened is that a couple of the private equity funds said, ‘Oh you know those troubled banks you have out in the West? You know, PacWest and some others. We’re prepared to invest in those, but only if you actually get this thing done.’ And so magically, what was going to take six or eight more months could get done tomorrow,” Guynn added.

Guynn placed the timing of Van Der Weide’s phone call in May 2023, based on his recollection of what he was doing at the time: traveling to watch Penn State play in the NCAA men’s volleyball tournament.

Guynn’s then-future son-in-law was a member of the Nittany Lions’ volleyball squad, he said. Penn State’s men’s volleyball team played Hawaii in the NCAA tournament’s semifinals on May 4.

Before TIAA could close the sale of its banking unit, multiple regulatory applications needed approval. Those green lights arrived soon after Van Der Weide’s phone call to Guynn.

The FDIC approved one of the applications on May 5, 2023, according to agency records. The Fed and the Office of the Comptroller of the Currency issued their approvals on May 9, 2023, records show.

“Now it didn’t get done for about two more weeks, because there were some things that the buyers and sellers had to do to work it,” Guynn said at the conference in St. Louis.

Guynn’s comments came in the context of a general discussion about the bank M&A approval process. “The big lesson there was, this can happen faster if there’s a need to go faster,” he said.

In an email Wednesday to American Banker, Guynn said: “I used the story to illustrate that most M&A applications can be processed in three to six months. I oversimplified the story to make it compelling for my audience. When the general counsel called, he said the Fed was prepared to act on the application if certain facts were verified. They were verified and the approval was granted a week later.”

The Fed and Van Der Weide did not provide comment.

Spokespeople for the FDIC and the OCC declined to comment.

Kerrie Cohen, a Warburg Pincus spokesperson, said in an email: “As longstanding bank investors, we appreciate the ability of regulators to move fast in a crisis. When appropriate, creating regulatory certainty makes it considerably easier to inject private capital into banks when they need it most and can avoid the need for a bailout.”

Centerbridge Partners, which teamed up with Warburg Pincus in the PacWest deal, did not provide comment. Banc of California did not respond to requests for comment.

TIAA and EverBank both declined to comment.

‘A private-sector solution became very viable’

Van Der Weide’s phone call to Guynn came at a key juncture in the unraveling of Los Angeles-based PacWest, the parent company of Pacific Western Bank.

Like Silicon Valley Bank, PacWest had been hit hard by rising interest rates in 2022 and early 2023. In the fourth quarter of 2022, PacWest sold $1 billion of available-for-sale securities at a $49 million loss. Its deposit costs were rising, and its deposit outflows were increasing.

SVB’s failure on March 10, 2023, led to additional deposit runoff at PacWest. The $41.2-billion asset bank took various steps to shore up its liquidity, including by tapping into the Fed’s newly announced Bank Term Funding Program, according to an August 2023 securities filing by Banc of California.

Warburg Pincus and Centerbridge Partners both explored the possibility of investing in PacWest in March, per the securities filing. But on March 22, PacWest announced publicly that its board had determined “it would not be prudent” to move forward with a capital raise transaction “at this time.”

By early May, the situation had changed. PacWest’s board met on May 3 to consider the status of strategic discussions, and it decided to initiate conversations with a larger number of potential strategic partners, per the securities filing.

That same evening, news about the PacWest board meeting leaked, and the company’s already-low stock price nosedived further. Depositors also fled. On May 4 and May 5 alone, PacWest lost $1.7 billion of deposits, according to the securities filing.

PacWest’s M&A deal wouldn’t come together for another two-and-a-half months, as the prospective seller explored its options.

But on July 22, 2023, funds managed by Warburg Pincus reached an agreement to invest $325 million in equity capital, while Centerbridge Partners-managed funds committed to chip in $75 million.

JPMorganChase also helped get the deal across the finish line, agreeing to buy $1.8 billion of PacWest’s loans and acting as the placement agent on the $400 million capital injection, according to Bloomberg.

Kevin Stein, managing director at Klaros Capital, said the deal was possible because PacWest remained solvent, despite its liquidity problems. 

He calculates that unlike some banks that failed in 2023, PacWest had positive tangible common equity as a percentage of tangible assets, adjusted for unrecognized bond and loan losses, prior to being acquired.

For PacWest, that metric was at 3.98% on March 31, 2023, according to Stein’s analysis.

“They were having a liquidity crisis, but because they had enough capital, a private sector solution became very viable,” Stein said. “And it was clear the regulators were supportive.”

The Banc of California-PacWest deal was announced on July 25, 2023.

One week later, on Aug. 1, TIAA issued a press release, stating that it had completed the sale of its bank to funds managed by Warburg Pincus and other private investors.

‘Act fast, don’t dilly dally’

Three prominent individuals at Warburg Pincus, Centerbridge Partners and the Fed in May 2023 had previously served simultaneously at the Treasury Department during the previous financial crisis.

Geithner, Warburg Pincus’ president from 2014 to July 2023, served as Treasury secretary during President Obama’s first term.

Zach Gibson/Bloomberg

Matt Kabaker, a top executive at Centerbridge, had served earlier as senior advisor to Treasury Secretary Geithner, as well as deputy assistant Treasury secretary for capital markets.

Van Der Weide, who’s been the Fed’s general counsel since 2017, was a Fed detailee to the Treasury Department in 2009 and 2010. While at Treasury, he worked on the legislation that became the Dodd-Frank Act.

The defining issue of Geithner’s tenure as Treasury secretary was government bailouts.

Geithner was an unapologetic supporter of the Troubled Asset Relief Program, writing in his 2014 book: “The world was burning. … This was not the time to focus on punishing the arsonists. It was time to focus on putting out the fire.”

By 2023, Geithner and Kabaker had moved into private-sector roles, where they had the opportunity to participate in the response to a crisis that was far less severe than the 2007-2009 emergency, but was still setting off alarm bells. Van Der Weide had returned to the Fed after his 2009-2010 stint at Treasury.

In a 2020 interview with the Yale Program on Financial Stability, Van Der Weide shared his perspective on the lessons the Fed and Treasury learned from the 2007-2009 crisis.

“Number one: act fast, don’t dilly dally. When you see a financial system heading toward the abyss, do something about it rapidly; don’t waste time trying to figure out what the perfect solution is. Just start acting to quell the panic,” Van Der Weide said.

John Zich/Bloomberg

Another major issue during Geithner’s tenure as Treasury secretary was the so-called revolving door between the government and the private sector. Progressives contended then — and still argue now — that the movement of individuals back and forth between Wall Street and Washington shapes policy in ways that help the industry.

Geithner served as Treasury secretary under then-President Barack Obama after a stint as president of the Federal Reserve Bank of New York. He has often had to correct the perception that he’d previously worked on Wall Street.

During a 2009 oversight hearing, a member of a congressionally appointed panel that was overseeing TARP said to Geithner: “You have been in banking.”

Geithner responded: “I have never actually been in banking. I have only been in public service.”

When Geithner later joined Warburg Pincus, CNBC reported that one of the reasons he chose the private equity firm was that he did not want to work for a company that he had either directly or indirectly regulated at Treasury or the Fed.

CNBC, which relied on a person familiar with Geithner’s thinking, also reported in its November 2013 article that Geithner had been looking for a job that would not bring him into daily contact with the people he did business with while he was working in government.

Geithner, who is currently chairman of Warburg Pincus, did not provide comment for this article.

Dennis Kelleher, the president and CEO of the nonprofit advocacy group Better Markets, told American Banker that the Fed’s actions in connection with the approval of the TIAA bank sale are an example of “secret insider dealmaking.”

“The Fed clearly thinks it can do anything — cut any secret sweetheart deal, hand quid pro quo benefits to a few connected Wall Street insiders, ignore conflicts of interest, tell the public nothing, grease the revolving door, enrich a handful of very grateful potential future employers — and get away with it,” Kelleher said in an email to American Banker.

“This is also just another outrageous example of the insidious and incestuous revolving door involving multiple former and current public officials, including former Treasury Secretary Geithner now leading a PE firm and former Wall Street lawyer Guynn who is now a senior Fed staffer supposedly responsible for regulating his former clients for whom he obtained secret sweetheart deals from the Fed just 2 years ago,” Kelleher added.

J.W. Verret, a professor at George Mason University’s Antonin Scalia Law School, had a more muted reaction, but was also critical of the Fed.

“The Fed as dealmaker is not healthy for the economy. That’s not a role the Fed is supposed to have,” Verret said.