With Friends Like These

FinCri Advisor recently ran a story about private equity investors and how they’re making it expressly clear that they’ll bow out of transactions to buy failed banks from the FDIC unless major changes are made to the policy recently proposed by the FDIC. That proposed policy’s requirements of 15% Tier 1 capital, a three-year “lock in” for the investors, and expanded cross-guaranty liability are all non-starters.

In what I believe is a short-sighted position, the Independent Community Bankers of America sent the FDIC a comment letter that basically supported most of the strict requirements proposed by the FDIC, although the ICBA generously conceded that the 15% capital requirement might be lowered to 12%. !2% isn’t going to fly with private equity in light of the fact that the current requirement for de novo banks is 8% for the first three years. “Why is the ICBA in support of driving away private equity from FDIC-assisted deals?” you might ask. I know I did.

As a result of some subsequent “back and forth” that I and other concerned banking attorneys conducted with the ICBA at the state and federal level, it appears that the ICBA believes that making it unattractive for private investors to buy failed banks will somehow increase the likelihood that such investors will invest in troubled banks before they fail. The ICBA thinks that if investors know they can’t get an attractive deal to buy failed bank assets and deposits from the FDIC, they’ll decide to jump into open banks that need capital because that will be the only deal in town.

I disagree. It’s not as if there’s a large pack of salivating private investors howling at the gates of the community banking business, demanding entry. Private capital flows to investments where the reward justifies the risk, and sinking capital into “troubled banks” these days without government protection on the down side has all the appeal of making love to a porcupine. Odds are that the agony will far outweigh the ecstasy. If there’s one thing that Washington Mutual and Guaranty Federal have taught private equity investors, it’s that in the midst of the worst recession of the post-World War II era, dumping a ton of private capital into a troubled bank or thrift and expecting to “work it out” over time without government assistance is like commandeering a cigarette boat to overtake the Titanic and jumping on board right before the ice berg looms out of the fog.

Here’s what signal I think the position of the ICBA sends to private investors: “Stay away; we don’t need your dough!”

Private equity investors have investment opportunities outside the commercial banking business to pursue, ones that don’t involve getting into bed with regulators and legislators who can turn on a dime and change the rules in effect at the time capital is invested. The commercial banking business is at a serious enough disadvantage with respect to attracting private capital without the added onus of having a major trade association tell potential investors that they’ll support another “game changer” that sprays the entire business with a most unattractive odor.

Of course, I could be wrong. We'll see if the FDIC follows the ICBA's advice and, if so, how much private capital that would have gone to FDIC deals flows to the land of "dead banks walking."