WASHINGTON -- The government selected Fleet/Norstar Financial Group Inc., a Rhode Island banking company, along with Kohlberg, Kravis, Roberts & Co., the well-known corporate buyout concern, yesterday as the buyer of the failed Bank of New England and two affiliated banks that collapsed in January.
L. William Seidman, the nation's senior banking regulator, said Fleet's bid had been selected because it represented "the lowest cost" to the program that insures bank deposits.
Officials acknowledged that as part of the deal, Fleet, which has a comparatively healthy capital base for a Northeast bank, would have to raise money to satisfy federal rules on its financial health.
Mr. Seidman, the chairman of the Federal Deposit Insurance Corp., also said the bailout would require an initial outlay of about $5 billion and would ultimately cost the sharply deteriorating fund that insures deposits as much as $2.5 billion.
Some of the initial outlay will need to be borrowed from the Treasury, Mr. Seidman said, because the bank fund, which is financed through industry premiums, is running so low.
Fleet, based in Providence, has banks in several Northeast states, including New York, Connecticut, New Hampshire and Maine.
It has no institutions in Massachusetts, where the Bank of New England is based.
The bidding for Bank of New England was hotly contested because the bank represented a potentially lucrative banking territory once its loan portfolio was stripped of its worst loans.
Also, the bank's fate has become a focal point in Washington as it it has become apparent that the banking industry may ultimately need to rely upon taxpayer funds to continue to assure its viability. The collapse of the Bank of New England, once the region's second-largest banking company, has heightened the sensitivity of lawmakers to the deteriorating condition of the bank insurance fund and has raised questions about the adequacy of the government's supervision of banks.
In the financial community, it has also prompted new concerns about the stability of the banking system.
Fleet edged out bids from Bank of Boston and San Francisco-based Bank of America, the nation's second-largest bank.
Fleet, which like nearly every bank in the region has been hurt by losses from bad real estate loans, is considered a well-managed regional institution that is ranked among the nation's 25 largest institutions, with assets of $33 billion last Dec. 31.
The transaction requires Fleet to raise $400 million in new funds and Kohlberg, Kravis an additional $283 million. The $683 million will be injected into both Bank of New England and Fleet.
Mr. Seidman said that Kohlberg, Kravis, which will own about 15 percent of Bank of New England, would be a "passive investor" and had assured regulators that it would exert no control over the bank's operations.
The fall of Bank of New England began in the 1980s with an aggressive expansion of lending for office buildings, hotels, shopping malls and condominiums that could not pay back their loans when the New England economy collapsed. Today the bank has $16 billion in assets and 320 branches in Massachusetts, Connecticut and Maine.