GOOD BANK, BAD BANK

The government is now speaking about implementing a good bank/bad bank plan. I actually worked on the first good bank/bad bank plan which the FDIC implemented for Continental Illinois National Bank (CINB) in 1984. CINB was a money center bank headquartered in Chicago. CINB was brought down by bad and fraudulent energy loans originated by Penn Square Bank, a strip shopping center bank in Oklahoma City.

The FDIC purchased $5 billion of bad loans from CINB for $3 billion. The FDIC then leased a group of about 150 employees from CINB to work down the portfolio of bad loans purchased. The largest portfolio concentrations were energy loans, shipping loans and real estate loans.
The shareholders were given warrants that would be in the money depending on the results of the purchased portfolio of bad loans.

A separate board of directors was set up to oversee the portfolio of bad loans. Zolfo Cooper was retained by that board to monitor the activities of the group leased from CINB. I was the Zolfo Cooper manager in charge of that engagement. I spent four years on the matter.

There is a great book on the whole situation called Belly Up. I HIGHLY recommend reading this book.

Oh, the result? CINB couldn't make it and was purchased by Bank of America. Follow the good bank bad bank proposal closely. It will be very difficult to devise a one size fits all plans that will work the first time out.

Cheers, Mike