Buying a bank?

I just saw the guy asking if it's illegal to short a bank and withdraw their cash, so I'm wondering something along the same lines:

If, hypothetically, I take a loan from a bank (a big loan) and then I buy the bank, to whom do I owe money? Wouldn't I be better off than before as my net worth will be the same but I would also own a bank?

Correct me if I may be wrong, but I could even pardon my loan and interests and owe nothing to the bank (it will be a loan to a shreholder) leaving me literally with the same net worth as before AND A BANK?

I'm sure there are some fallacies and financial weaknesses in my argument, but no matter how hard I try it, I can't see find any besides the fact that I may be limited to borrow only 60-80%, but for the sake of the discussion, assume 100%).

Moreover, to stretch it further, could a PE fund go to a bank and say: I want to buy you and I want you to finance 80% of my LBO with one of your loans, and you will also be the collateral, in other words, the same bank that lends you is the COLLATERAL). This may be an MBO right?

What the theory and practice has to say about this? Couldn't really find such discussions in books.

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I didn't respond in detail to that other thread because the premise was incredibly stupid. This one is less so, so I'll give you some color.

TL;DR - no, you could not do this. 

Long answer with particular reasons:

1. The whole scenario is predicated on the basis that the owners want to sell and that the regulators would approve you as the new owner. Part of that regulatory approval is understanding the source of financing and your method would not pass muster with them for reasons that should be obvious. Totally ignoring these issues, however...

2. You would still owe the money to the bank. You would not be better off than before. In fact, quite the opposite. Reg O is a regulation that specifically address credit exposure to insiders, directors, and major shareholders. They get increased regulatory scrutiny and require extra internal administration to ensure that the scenario you're describing is not permitted to happen. Intentional and egregious violation of Reg O would get you an immediate consent order and materially impact the value of the bank. Probably even more than the hit to earnings and capital that simply "pardoning" (which is not the right word) the loan would. 

3. To qualify for a loan as big as would be necessary to buy the controlling interest of any decently sized bank is not going to be as easy as you think. Banks generally are not in the business of just giving out loans for no particular reason. They also have restrictions about loaning money with the express purpose of using the proceeds to buy stock in the bank providing the money. Don't think you are the first person to try such a scheme. Regulators have seen it all before and they just don't permit it. Banks will loan money for projects up to ridiculous sums of money, but you're suggesting you'd just "get a big loan" without collateral. If you say the collateral is bank stock, they wouldn't approve the loan. If you said it was to buy other securities, they wouldn't approve the loan because that's a loan for stock speculation. If you said its for some other project, they'll disburse the proceeds directly to the other entity - not you. If you somehow got the proceeds directly and used them to buy bank stock... guess what? You just made a material misrepresentation and now your loan is due in full and you personally guaranteed it. Even if you bought a majority stake and consummated the transaction in a lightning fast closing (yeah right), the Board would have every right to block your votes so you still lose. 

4. Even if you owned the bank, you are still required to have a board of directors and the board has rights and requirements. Those rights and requirements include ensuring there is a strong risk management, audit, and compliance function built in and the board could not certify that those things are in place if you tried to exercise management control that would directly result in benefitting you at the expense of the bank and its stakeholders (which include the depositors and, by extension, the FDIC and other regulators which, by extension, means taxpayers). The board would/could not permit this action and you would not be able to operate when the board doesn't sign the certifications they have to provide to the regulators every quarter. The lead director would make a call to the regulators and you'd get woken up in the middle of the night by people asking you questions and they'd chain the doors to the bank closed if they thought they needed to in order to protect depositors.

So no, this is theoretically, practically, legally, and operationally not possible. 

"And where we had thought to be alone we shall be with all the world"

Excellent comment. I cover banks for a living and I couldn't have said this better myself. You hit on this, but just to clarify--per FDIC rules, a single borrower cannot exceed 15% of the bank's capital. So it would be difficult to take out a sufficiently large loan from a single bank to buy a controlling stake in the bank, let alone all ownership interest. 


Great point. Didn't even think about that part because of the absurdity of it all, lol. 

Further buttressing your point, most banks of any size have internal lending limits that are fractions of the legal lending limits. 

"And where we had thought to be alone we shall be with all the world"

So, yes, if you took out a loan from the target bank large enough to buy the bank and you forgive the debt, the debits and credits net to no change in your personal net worth and you still own the bank. But the real-world result would be a catastrophic loss to the bank's capital base (all or nearly all of it), which would necessitate the regulators taking over the bank. So the end result is that you wouldn't own the bank--the bank would be taken over by the FDIC and its remaining assets sold by the FDIC to reimburse the insurance fund. 

The tax implications would be weird and probably unfavorable. The debt forgiveness is taxed as regular income; however, the total loss of your stock ownership interest in the bank would be a capital loss, which has a $3,000 annual limit that carries forward, so you'd probably be worse off financially, in practice. 


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