The limbo line

It's clear now that BankUnited Financial Corp., a $14 billion thrift in South Florida, is not long for this world. A zombie bank -- one the market deems essentially insolvent, even though it's still open for business -- it exists in a state of limbo, waiting for the seemingly inevitable knock on the door by regulators.

So what is the Federal Deposit Insurance Corp. waiting for? The Coral Gables lender, which hasn't filed full-year and fourth-quarter earnings and has been threatened with delisting by Nasdaq, has been hit hard by declines in the value of its option-adjustable-rate-mortgage portfolio. Its stock has languished at less than $1 since September (it was trading at 21 cents on March 17), and even though private equity firms such as Carlyle Group and WL Ross & Co. LLC have expressed interest, BankUnited has failed to find buyers or raise outside capital. Indeed, sources say the bank has effectively ended its attempts at saving itself and is waiting for regulators to put it into receivership.

Still, the FDIC waits. "The sense is that the FDIC has been slower than expected in otherwise seizing banks that need to be seized," says a financial institutions banker.

This may be playing out with BankUnited. A source who has spoken with potential bidders says the FDIC recently set a 90-day window to resolve BankUnited's fate, giving itself some time to get to the bank, even though it seems unlikely the situation will be resolved without the FDIC's intervention. "One of the problems with closing up institutions is that it's not a science. It's an art in terms of when you do it," says Gilbert Schwartz, partner at Washington-based law firm, Schwartz & Ballen LLP. "The theory is that if the hemorrhaging is under control, you may as well focus your energy on other, more important things."

The FDIC has closed 17 banks this year, but it doesn't seem to feel the need to jump immediately into every insolvency situation. It probably lacks the personnel to handle every situation simultaneously.

Last year, the FDIC increased staffing by 60%, or 140 people, in its Division of Resolutions and Receiverships. The agency also said the new hires would include about 25 former FDIC employees with experience in bank failures, who would come out of retirement to help deal with what was looking like a bumper crop of insolvencies. And that's what happened, with a further 23 banks failing in 2008, including Washington Mutual Inc., the largest failure on record. There are also public relations considerations. A good part of the regulatory mandate, especially these days, involves preserving, if not creating, confidence in the system.

As such, the FDIC is moving deliberately to deal with insolvent banks. Rather than act quickly, the agency may deem it more prudent to let them sit, as long as there's no bank run, rather than risk creating panic. "There's no reason to close those things if they're not doing any harm," says a banker. In fact, the banker says the agency has also been loath to close too many banks in one region at one time so as not to create fear in regional pockets of the country. "They've been jumping around from region to region," he says. The FDIC's data bears this out, with the first six bank closings this year coming in Illinois, Washington, California, Utah, Maryland, Florida and then Georgia. But there may also be other, less publicized advantages to the FDIC's reluctance to move on banks such as BankUnited or Santa Monica, Calif.-based FirstFed Financial Corp., whose stock the New York Stock Exchange delisted Feb. 27.

"Zombie banks do perform a function," says a banker who has dealt with several failed institutions in recent months. "The government is warehousing and storing bad assets in these banks." This function, the banker argues, prevents both regulators and investors from having to deal with questions of valuation and demand in dysfunctional markets.

Sill, it's not a simple game to play. And it's always better to be a little early than a little late.