PART OF THE PROCESS: Complaints by community activists were “not unexpected,” in deal, said John Thain, CEO of CIT Group. Still, the banks sought to avoid a public hearing.
PART OF THE PROCESS: Complaints by community activists were “not unexpected,” in deal, said John Thain, CEO of CIT Group. Still, the banks sought to avoid a public hearing. Bloomberg

When weighing the controversy over the CIT Group-OneWest Bank merger, set aside details like their performance and promises for the future, and just consider the players behind the $3.4 billion deal.

Some of them, like CIT chief John Thain, have been lightning rods for controversy since the financial crisis, and their companies are saddled with complex histories. It is unsurprising, then, that the deal has drawn the ire of community groups that will be aired during a public hearing.

The Federal Reserve and the Office of the Comptroller of the Currency announced Friday they would hold a public hearing later this month in Los Angeles to get input on its potential public impact.

The merger's fate has broad implications for many reasons, not least of which is the size of the deal and the fact that it would create another systemically important financial institution. Many industry players are hopeful that an approval in this case could give way to more multibillion-dollar deals. The CIT-OneWest transaction will likely go through, but additional hoops like a public hearing increase the chance of delays.

The threat of delays raise uncertainty, create the risk that key talent will leave or opportunities will be missed amid a period of rapid economic change, and -- more generally speaking -- the fear of such delays could deter other potential buyers and sellers from making the leap.

After all, proponents of big M&A are seeking a more hopeful sign than M&T Bank's bid to buy Hudson City Bancorp, which has dragged on for more than two years mainly because of compliance issues.

The architects of the CIT-OneWest deal left themselves some wiggle room, setting the merger deadline for mid-2015, or just a few weeks shy of a year after it was announced.

Thain said during the company's fourth-quarter earnings call last month that the companies had anticipated the blowback from the community groups.

"We continue to believe the transaction is on track to close in the first half of this year," Thain said. "We and OneWest remain committed to substantial investments of both time and money in our communities."

 

Complicated History

Even deals of broad significance usually have unique characteristics, and this deal is no exception.

The buyer, the $48 billion-asset CIT, is a specialty finance company that received $2.3 billion from the Treasury Department's Troubled Asset Relief Program. The investment was not enough to prop up the ailing New York company and the taxpayers were wiped out when the company sought bankruptcy reorganization in 2009. Thain became the poster child for corporate excess because of reports of a lavish renovation of his office at Merrill Lynch in 2008.

The $23 billion-asset OneWest is the bank that, with the backing of private-equity titans George Soros and John Paulson, bought the operations of the failed IndyMac. OneWest received one of the most attractive loss-sharing arrangements provided by the Federal Deposit Insurance Corp., including the right to transfer the loss-share coverage to a new owner without FDIC approval.

Subsequent agreements typically required FDIC approval to be transferred. In fact, the Pasadena, Calif.-based OneWest has two other loss-sharing agreements for other fail banks it acquired later, and the FDIC said in a letter to the California Reinvestment Coalition that since the sale to CIT is structured with OneWest emerging as the surviving bank, the agency's approval is not needed on the transfer of any of the three agreements.

The history of the two organizations is a key part of the complaints by California Reinvestment; Kevin Stein, associate director of the group, has repeatedly said that the deal has significant public subsidy without much public benefit, while pointing to the Tarp wipeout and the loss-share agreements.

Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, calls the deal "lawful but awful" and said transactions like this are the reason "people are cynical and outraged with our financial system."

"It takes a great deal of chutzpah and many lawyers to feed at the taxpayer trough this voraciously," Hurley said. "The value of the loss share is high because there were not many bidders for IndyMac and it was an inducement to bid on the franchise. It was a sweetheart deal, but for it to be an incentive for the merger now is like sticking your thumb in the eye of the taxpayer again."

Analysts, however, say CIT should not be judged on the organization that it was when it went into bankruptcy. In the subsequent years, and under Thain's leadership, the company has sought to remake itself into a sturdier company and acquiring OneWest would further that.

"A lot of the things [about CIT] that have been brought up I feel have been unfairly raised," said Sameer Gokhale, an analyst at Janney Capital Markets. "It is a different company, they've grown their deposit base, they're less exposed to the capital markets, and they've been through the wringer with the regulators."

Both banks received a "satisfactory" rating on individual most recent Community Reinvestment Act exams, according to the Federal Financial Institutions Examination Council website. The companies have said they've set an objective to receive an "outstanding" rating.

The most recent CRA plan, filed on Thursday with the OCC, sets a $5 billion target over four years for total community activities, with $3.8 billion in CRA-reportable lending.

"Following the combination, CIT will significantly expand the scope and increase the amount of community reinvestment that OneWest Bank will provide to its communities," Curt Ritter, a spokesman for CIT, said in an email. "We will also establish a community advisory board that will support the bank in developing and refining our community programs and annual community benefits plan."

Stein of California Reinvestment said that the plan falls short of what his organization thinks is appropriate. In his estimation, the commitment puts about community lending at about four to five percent of the bank's deposits.

"We remain very disappointed even given the new plan; even with the increases, they are well below our benchmarks of 20%," Stein said. Last year the group persuaded the Banc of California to commit to a 20% investment rate in order to settle protests over its plans to buy branches from Banco Popular.

Further, Stein says OneWest is responsible for thousands of foreclosures in California and wonders how many of those were "bona fide" foreclosures.

In the meantime, some community groups have come to the defense of OneWest. Faith Bautista, president and chief executive of the National Asian American Coalition, said in an interview she is backing the merger because she has seen first-hand the company working with struggling homeowners on loan modifications and principal reductions. Secondly, she said, OneWest worked with local real estate agents to dispose of IndyMac's repossessed properties.

"They are awesome. They are beyond awesome," Bautista said. "I don't mind a public hearing because I will fill it up, but that is not a solution. The hearing will not solve a problem. This is a good merger."

The Fed has received more than 1,000 comments on the merger, with the majority of them coming via a form letters generated by both sides.

 

The Outlook

Although the public hearing could result in the combined company upping its CRA commitments, it is unlikely to derail the merger, several banking attorneys said. The danger, of course, is in the potential for a delay.

Some experts say the slowdown will be minimal.

"With the hearing in late February, there is no reason that the Federal Reserve cannot collect the feedback needed in time to complete this review in June or July," Jaret Seiberg, a senior policy analyst at Guggenheim Securities, wrote in a research note Friday. "We question whether the hearing will even delay the closing of the deal by more than a month or two."

But others are unsure. "Given the regulatory environment, there are already so many reasons for delays besides a public hearing," said another analyst, speaking privately.

And the more time passes the more chance there is for a stock market convulsion that changes the valuation of the deal, or for some other shift in market dynamics that affects the business plan.

Later this year, the outcome for CIT-OneWest will be clear. What will be harder to gauge is how much the drawn-out spectacle with affect the psyches of other dealmakers.

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