Banking Law

Those who can, do, those who can't teach; and those who can do neither, administer.
---Calvin Calverley

Last week's release by the FDIC of a proposed policy statement on the acquisition of assets and deposits of failed banks and thrifts by private equity investors set off a mini-explosion of negative reaction from private investors and pundits. After a reportedly "marathon" session between private investors and FDIC Chairman Sheila Bair this week, some sources were gloomy about the proposal and other sources were hopeful. On the gloomy side was The New York Post which, in its typically understated fashion, ran a headline that screamed: "SO JUST GRIN & BAIR IT; FDIC Chief Unmoved."

A meeting called by Federal Deposit Insurance Corp. chief Sheila Bair this week with several banking and private-equity bigwigs suggests the regulator has made her mind up when it comes to PE firms buying banks: Thanks, but no thanks.

That was the conclusion of one participant in Monday's meeting, who described the sit-down with top-tier financial players as a way for Bair to learn about how to help bank executives step up and buy fallen banks.

While the source described the meeting as friendly, this person noted that several of the people in the five-hour meeting at the FDIC's Washington office were banking executives, including JPMorgan Chase's retail banking boss Charlie Scharf.

Meanwhile, just three of the meeting's participants were from the private-equity world -- Wilbur Ross, Kohlberg Kravis Roberts' Deryck Maughan and Warburg Pincus' Michael Martin -- even though PE firms have been the most active buyers of banks that have gone into receivership.

According to sources who talked to The Post, the FDIC has an unannounced agenda to dramatically reduce the number of insured institutions, inasmuch as Ms. Bair has determined, in her infinite wisdom, that the current number of FDIC-insured institutions is too large to support the grazing needs of the entire herd. Therefore, it would be better if banks bought failed banks' deposits and assets, thereby reducing the total number of banks, rather than have private equity investors charter new banks to buy those assets and liabilities. I, too, have heard that view from my sources, and believe that this is, in fact, the FDIC's position. They'll never "fess up," of course.

If that's the case, then it makes sense for the FDIC to discourage private equity investors from bidding for failed banks and thrifts, except in cases where the FDIC thinks that the private investors are the only game in town, as was likely the case like for IndyMac and may well have been the case with BankUnited.

Wilbur Ross, who is involved in the BankUnited deal and has repeated and publicly indicated an interest in playing a large role in bringing private equity to the failed bank banquet, wasn't exactly turning cartwheels over the proposed policy, nor were other private equity investors.

"It may be well intentioned, but I think it could guarantee that there will be no more private equity coming into banks," Ross said in reaction to the guidelines this past weekend.

And Ross is not the only one who feels this way. "We believe that the FDIC's proposed guidance would deter future private investments in banks that need fresh capital," Douglas Lowenstein, president of the Private Equity Council, said in a statement last week.

Seeking Alpha's Matt Stichnoth was driven to a fit of exasperation.

If Sheila Bair doesn?t want any more private equity money in the banking, she should just come out and say so. . . .

Fat chance! She might then be criticized by some influential politicos for driving away private investment that could save the FDIC some serious bucks. On the other hand, if she encourages private investment and the investors make their hoped-for return, lame brains like Barney Frank, Maxine Waters, or Chris Dodd might eventually erupt in a fury of vindictiveness over the fact that private investors made money in return for putting their capital at risk (which is perversely becoming un-American in the current political climate). No, better to obfuscate and set the hurdles too high to leap, rather than come right out and be publicly honest about it. If a private deal is never made, you can never be criticized for being too hot or too cold. You never actually said "no" and you never actually said "yes." Inertia often passes for action in a bureaucratic dimension.

Perhaps the FDIC was putting an onerous set of conditions forward first in order to demonstrate to potential critics that it tried to take a hard line but that private capital wouldn't bite. If it then backs off and actually makes the deal points attractive, it can deflect some of the criticism coming from its hind quarters that it could have driven a harder deal. Some observers opined today that they think the FDIC may be  "listening to reason."

?I definitely felt that the FDIC was listening in a constructive mode,? said Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut Law School in Hartford, and who attended the meeting in Washington. ?The private-equity representatives spoke with a heavy hand, saying that without some compromise they would walk away.?

The simple truth is that as it stands, the proposal is a dog that won't hunt, although I'm confident that it can roll over and play dead. We'll see in the next thirty days whether or not the FDIC is serious about giving the proposal legs or if this is just another exercise in futility.