Banking Law

In today's American Banker (paid subscription required), Alexandrs Rozen conducts an extensive interview with Blackstone's CEO, Hamilton James, on a wide range of topics. However, the snippet that most interested me was James' revelation that Blackstone and other private equity big-whigs were finished with additional efforts to try to get into the banking business, thanks to the federal banking regulators.

PE's investment in banks ? a lot was made of it on the eve of the credit crisis. Where does it go from here?
It is pretty much over. The FDIC doesn't really want to have PE taking over the ownership of banks. Politically, people worry that "If they [sponsors] control the banks, will they use the banks to do something that serves them?" I don't think that would ever happen, but, nonetheless, it is not worth the political flak of doing that.

So they have set up a set of rules where PE is held to a higher standard than other banks, even foreign banks, which are moving the jobs out of the United States into other countries, and which is an oddity. At least PE would keep the jobs here. But, nonetheless, reflecting the political realities, that's pretty much over in terms of a lot of PE capital going into banking.

James doesn't mention the Federal Reserve Board, but its attitude toward private equity players like Blackstone is similar to the FDIC's.

Ironically (or perhaps not), just last Wednesday, the American Banker ran an article that made a quite different contention concerning private equity investments in banks.

Private-equity firms willing to fund cash-strapped banks are snatching opportunities from more traditional consolidators.

That article related incidences of private equity investors stepping in to recapitalize distressed banks before they failed. In doing so, they're thwarting other banks in better financial condition who would be willing to buy those banks. The article's author, Kate Davidson, also contended that some banks (the story focused on those in the Pacific Northwest) that had increased their capital in order to take advantage of FDIC-assisted acquisitions appear to be running out of opportunities. Future "failure prospects" of an attractive size appear to be raising capital prior to their failure and the remaining banks that are likely to fail are generally too small to make deals worthwhile.

I take away a couple of preliminary thoughts from these stories. First, these trends seem to be signs that the bottom of the bank failure trough is in sight. The FDIC contends that this year will be the high water mark for bank failures (although next year won't exactly be a bed of roses for the 860 banks currently on the the FDIC's problem bank list). Barring a double-dip or some other set-back to the economy generally (which in this day, with the feckless political leadership in D.C., is always a risk), maybe the FDIC is correct. I certainly hope so.

Another thought that occurs to me is that Blackstone's exit reinforces a supposition I expressed in September: there's "private equity" and then there's "PRIVATE EQUITY." Some are winners and some are not. Notwithstanding the fact that Blackstone has been involved with some early successful FDIC-assisted deals (for example, Bank United), it appears that they've decided that the regulators don't view them as the "right kind of private equity" going forward.