Banking Law

Today's American Banker contained a front page article by Rachel Witkowski (paid subscription required) that discussed a very important trend that many interested players have experienced or seen with respect to the acquisition of failed banks from the FDIC: there's "private equity" and then, there's "PRVIATE EQUITY."

Georgia's failed banks are multiplying, but very few homegrown institutions without private-equity backing are buying them.

On Friday, Community and Southern Bank in Carrollton, Ga., reinvigorated by a private equity group and bank turnaround expert Patrick Frawley, acquired three failed banks in the state with a combined $603 million of assets.

Regulators tend to prefer that existing banks, not groups of private investors, acquire failed banks, yet Community and Southern, along with State Bank and Trust Co. in Macon, Ga., has been able to put private-equity money to use in FDIC-assisted deals. Friday's pickups are among five such deals Frawley's bank has completed since a private-equity group revived it in January with an initial investment of $255 million.

We've discussed ad nauseum, legion are the travails of private equity investors who want to get in the game of purchasing broken banks from the FDIC and have been thwarted by what many private equity investors (such as Wilbur Ross and Gerald Ford) believe is an "inexplicable prejudice" by the FDIC (and also by the Federal Reserve) against their brand of dirty, sexy money. Ms. Witkowski parses the nuances of "private equity" and reveals that when it comes to private equity, there are some investors that, to the regulators, give off an aroma of Old Spice and others that give off the aroma of a dead skunk in the middle of the road stinking to high heaven.

Along with capital, regulators also want failed-bank bidders to have significant banking experience. Analysts say Community and Southern has succeeded because Frawley has worked both sides of the table ? as a veteran supervisor at the Office of the Comptroller of the Currency and then as a bank turnaround expert.

There area couple of important points here. First, in this context, "experienced management" to the federal banking regulators means not running a regional branch network for Bank of America, but having hands on experience in taking lemons and making lemonade out of them. "Been there, done that" when it comes to building a Phoenix out of the ashes of a burned-out bank (and preferably, a significant number of burned-out banks) is a phrase filled with poetry in the ear of the FDIC. Moreover, it is pure gold if your top dogs have established credibility with the regulators by either previous tenure in their ranks or having successfully interacted with them over the years.

A point not discussed by Ms. Witkowski, but one that I think has an important bearing on private equity's chances of being successful in making it into the bidder's line in the first place and, once there, having a chance of actually succeeding, is that the "private equity investors" need to have a certain mindset and to make a certain positive impression if they are to have a chance of success, whether or not a credible management team is on board. Investors who are appear to be very likely to rely on credible management (under the guidance of a board of directors that contains truly credible, experienced and independent members) is likely to have a much better chance than a cadre of suspender-wearing, Armani-suit-armored, cigar-smoking, sneer-emoting, thirty-something Masters of the Universe, whose astral auras scream "New Yawk, New Yawk, It's a Wun-a-ful Town," and who convey with every word, tone, and gesture that (A) they're doing the Feds a favor by showing them how it's done "in the real world." The latter will find that their applications find repeated roadblocks springing up like roadside weeds, and that the march to approval is like a death trek through the Gobi Desert where, day after day, the oasis shimmering on the horizon never disappears, yet never grows closer by day's end.

Finally, notwithstanding what kind of private equity player you might be, as Ms. Witkowski rightly observes, if you're bidding against a bank, you'll be starting the match behind the eight ball. The "strategic buyer" will almost always win those contests.