When a bank holding company files for bankruptcy, it usually occurs after the Federal Deposit Insurance Corporation has taken away its banking subsidiary. In such a Chapter 11 case, the only thing left for the company to do is marshal the assets â€" including a typically large tax refund â€" and pay out the results to creditors before liquidating. Washington Mutual provides the most obvious example of this basic model.
But a small bank holding company in Wisconsin is following a different model. The company, Anchor BanCorp Wisconsin, plans to use Chapter 11 to recapitalize rather than liquidate. And it filed for Chapter 11 before its bank, AnchorBank, was taken over by regulators. Indeed, it hopes that its Chapter 11 case will avoid such a takeover.
During the financial crisis, the holding company received more than $100 million from the federal Troubled Asset Relief Program. But it was still wobbly, and faced the prospect of losing its bank.
By filing for Chapter 11, it could take three crucial steps. First, it would be able to pay off more than $180 million in debt owed to other banks for just $49 million.
Second, it could convert the United States Treasury’s preferred stock â€" received as part of the TARP bailout â€" into a small equity stake, worth about $6 million, in the holding company. As a result, the Treasury Department would realize a loss on its TARP investment, though that is a relatively small piece of that program.
And most important, Anchor said it would cancel its existing shares and sell the remaining new equity to investors, leading to the recapitalization of the holding company.
Anchor filed its Chapter 11 petition on Aug. 12, and a judge approved its plan late last week. Federal regulators still need to officially sign off on the plan, but Anchor said in its disclosure statement that it had been in contact with those regulators and that they “have not raised any objection.â€
The speedy trip through bankruptcy was the result of a prepackaged bankruptcy case that included the creditors voting on the plan before the bankruptcy filing. This may well provide another template for use of Chapter 11 in connection with other financial institutions, although it does require swift, pre-emptive action by the debtor’s management before the problems at the regulated subsidiaries get out of hand. The crucial question is whether it can be applied at a financial institution that needs a recapitalization in the hundreds of billions, rather than the hundreds of millions.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
