Banking Law

The American Banker chose to post an article online outside it's subscription-based firewall, which means that readers who don't subscribe to that publication get a chance to read the article and see what they're missing on a daily basis. I don 't get paid to plug that trade publication (not even a discount on my annual subscription price), but I often quote from its articles because it's one of the best sources for news on banking. This one, authored by Paul Davis, addresses a subject that I follow with particular interest: the problems that private equity investors are having participating in the resolution of failed bank transactions handled by the FDIC.

Though executives at many private-equity firms continue to raise capital and scout opportunities, few have emerged victorious in the bidding for failed institutions in recent months.

Davis discusses a number of reasons for the failures cited by private equity firms, including the slower-than-expected pace of bank failures (which is not considered slow enough for many small bankers who've watched their banks crumble). For unassisted deals that some investors are now considering, the amount of due diligence required to make sure you're not buying a pig in a poke is daunting and time consuming. Davis also lists a factor that's been apparent for some time: the aversion of federal banking regulators (especially, in my opinion, the FDIC and the Federal Reserve Board) to deal at all with "private equity" (a term they refuse to define with specificity but, like pornography, claim to recognize when they see it). I guess singing "getting to know you, getting to know all about you" repeatedly to the FDIC for the last year hasn't done private equity players a lick of good. When the FDIC thinks of "private equity," the only image that pops into its mind is a three dimensional holograph of the DNA structure of the Ebola virus.

Of course, major private equity investors aren't going to be brutally candid about their feelings in a public manner, because they're not all ready to abandon ship when there's still a chance that they can ride the failed bank wagon train to the land of milk and honey. According to investors Davis spoke with, they're taking a clam and sanguine approach. They assume that as banks continue to fail, existing bank acquirers become more scarce (because they've either eaten their fill or they, too, have problems to deal with), and the economic recovery continues to remain fixed firmly on the distant horizon, the FDIC's sense of antipathy will weaken and, eventually, private equity will worm its way into the FDIC's cold, cold heart.

Davis also discusses a trend that we've seen manifest itself, and about which we've blogged recently: private equity saying "to heck" with failed bank deals and turning to still-solvent deals where a more sympathetic federal regulator may be involved and/or where the competitors aren't other existing institutions who can offer a better price for "strategic" reasons. The downside risk to playing that game is well articulated by investor Wilbur Ross.

But Wilbur L. Ross Jr. said many firms are engaging in a "dangerous exercise." His W.L. Ross & Co. was among eight investment firms that successfully bid on BankUnited of Coral Gables, Fla., earlier this year.

"If you are going to do a nonassisted transaction, you have to be a lot more certain that your numbers are right" given the lack of loss-sharing agreements, Ross said. "You have to be sure that the troubles aren't so severe that the equity you invest will be wiped only a few months later."

For that reason, Ross said his firm is not dedicated solely to pouring capital into banks.

"We are not pigeonholed," he said. "That's what makes us different. We like banks now and see them as a decent opportunity. When that is no longer the case we will go on to something else."

That's my personal opinion, as well, and I don't think Mr. Ross is so very different from many other private equity investors. If the opportunity is no longer "decent," the investors will look elsewhere. I sense that a number of private equity investors who've been unsuccessfully pursuing failed bank transactions are reaching that point, or will be reaching that point by the end of this year.