Thursday, June 27, 2013

Jun 28 (1989) FDIC sells MCorp to Banc One: Ross Perot says thanks for "stepping up when disaster was at hand"

The Bank One Center, originally known as Momentum Place, completed in 1987 as the new headquarters of MCorp Bank.

On this day in 1989, the FDIC sold twenty failed subsidiary banks of MCorp of Dallas, TX to Banc One of Columbus, OH. MCorp was a holding company for 25 Texas banks and one trust company.  With $18 billion in assets, it was the second largest banking entity in Texas (FirstRepublic was the largest).

A year before the FDIC's arrival, MCorp sold off part of its businesses to try to boost profits. First, it sold MTech, its tech subsidiary, to Electronic Data Systems (Ross Perot's company) for $281 million. Next it sold MNet, its consumer lending operation, for $119 million. These two sales enabled the holding company to accumulate $400 million in cash reserves.

As weaknesses in MCorp's subsidiary banks became apparent, the Federal Reserve ordered MCorp to release its $400 million in cash reserves to shore-up its struggling banks. The board refused, claiming funding a failing institution was not in the best interest of the holding company's shareholders.

Despite a slew of lawsuits, MCorp's board won and got to keep both the cash reserves as well as the five remaining performing banks. The FDIC, on the other hand, incurred losses of $2 billion cleaning up the failed entities.

The FDIC made sure this never happened again. It worked with Congress to approve a cross guarantee provision that protected the insurance fund from future holding company conflicts of interests. While some bankers were not happy, in a phone call to FDIC Chairman Lewis William Seidman, Ross Perot thanked "the FDIC for  being willing to step up and do something when disaster was at hand."

Further Reading
FDIC case study on MCorp
Full Faith and Credit by Lewis William Seidman
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Flannery O'Connor

You shall know the truth and the truth shall make you odd.