Extreme Makeover: Bank Edition

Story Highlights:

• BankUnited, a Florida-based thrift, failed last Thursday.
• This was the 34th and largest bank failure of 2009.
• Daily operations weren't interrupted, as the FDIC insured deposits and brokered a quick sale to private equity firms.
• Failures of regional thrifts in areas hit by high foreclosures shouldn't surprise and needn't cause worry.

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It's a classic tale of American rebirth: A once-suffering franchise gets a new cast of characters, a new lease on life, and finds new success. From the business world to the new Star Trek flick, we've seen it time and again. Now a new episode is perhaps upon us, with news breaking late last Thursday of BankUnited's "failure" and subsequent sale to private equity firms. It's the largest of the 34 bank failures year to date. But though larger in scope than we've seen lately, BankUnited's failure isn't reason to panic. In fact, "failure" could help this and other companies change for the better.

Though its $12.8 billion in assets aren't small potatoes, BankUnited is just a regional thrift. We still haven't seen a national bank fail among the 34 going under this year. The other 33 each had less than $5 billion in assets, with all but five under $1 billion. Sure, Financials aren't in wonderful shape and likely won't be for some time, but the lack of epic national failures is a good sign our banking system, once feared as systemically rotten, has found its way to firmer ground. Keep in mind, BankUnited is a touch smaller than IndyMac, whose failure last fall brought much panic but little actual fallout nationally—there was no chain reaction, no bank failures upon failures, unlike the savings and loan crisis in the late 1980s.

Think about what a regional thrift is, and this makes perfect sense. Thrifts earn their keep taking savings deposits from local residents, subsequently making mortgage and other loans to mostly local borrowers. Without a more diversified business model, their success can be largely contingent on the health of the local housing market. Housing weakness in Florida, BankUnited's home, has been well documented for a few years now. Is anyone surprised a few local thrifts went down due to increased foreclosures? Just as investors realized it wasn't really news when regional IndyMac went belly-up in the wake of heightened foreclosures in the Golden State, we don't anticipate the initial ripples wrought by BankUnited will make nationwide waves.

If anything, the BankUnited saga shows the US banking system is working just fine. Though the company was technically shuttered by the feds Thursday, it was open for business as usual Friday. The FDIC simply swooped in, insured deposits, and brokered the sale. No panicked depositors queuing around the block, no nationalization, and no disruption to daily operations. Notwithstanding the estimated $4.9 billion hit to the FDIC's deposit insurance fund—no chump change, but less than IndyMac's tab—the lingering consequences should be minimal over the longer term.

Perhaps most importantly, it's capitalism at work. In capitalistic systems, weak companies sometimes fail and are absorbed by larger, stronger companies. The new owners keep the best parts, shed the worst, tinker a bit, and a stronger, better entity can emerge. Creative destruction, if you will. In fact, this is already happening at BankUnited, whose new leaders already announced it will branch out into commercial and small business loans to grow and return to profitability. Like Star Trek fans, Bank United customers just might find their new bank ends up even better than the original.