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FDIC eases rules for private-equity firms to buy failed banks -- sort of

August 26, 2009 |  4:03 pm

Faced with a rising caseload of failing banks, the Federal Deposit Insurance Corp. decided today that it can’t be overly picky about who buys the carcasses.

The insurance fund’s board voted to back down from a proposal to require that private-equity firms maintain an unusually high capital-to-assets ratio for failed banks they buy.

The FDIC board voted to lower to 10%, from a proposed 15%, a basic measure of the minimum capital buffer that private-equity investors must maintain for three years after buying a bank. A lender’s capital is its bulwark against loan losses.

"We want to maximize investor interest in failed institutions," FDIC Chairwoman Sheila Bair said at the meeting, explaining the decision to lower the capital threshold.

Bairaug25 But the 10% capital requirement still is twice the level that an existing bank must maintain to be considered "well-capitalized" by the FDIC. And as Rolfe Winkler at Reuters notes, the FDIC actually set a higher standard than it appears, because the 10% refers to so-called Tier 1 common equity, a stronger buffer than the broader Tier 1 capital gauge.

The original 15% capital proposal had triggered outrage from some private-equity leaders, including Wilbur Ross of WL Ross & Co., which was part of a partnership that bought the failed BankUnited Financial Corp. of Florida in May.

"I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form," Ross told the FDIC in a letter last month.

Today, Ross told Bloomberg TV that the revised proposal "is better than the one they had before but it isn’t a champagne-cork popper."

The Private Equity Council, representing some of the industry’s biggest firms, said in a statement that the FDIC’s revisions were an "improvement" from the original plan. But the group still called the new rules "onerous," and said it was "counterproductive to impose measures that could deter investors who are ready, willing and able" to provide capital to banks.

"Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise," the council said.

Another potential sticking point: The FDIC stood firm on its plan to forbid private-equity buyers from quickly flipping any banks they buy. They’ll have to hold on to the institutions for at least three years.

The FDIC’s fear is that private-equity buyers could swoop in, pick up failed banks on the cheap (with the FDIC absorbing most of the loan losses), then spin them off at a profit to other investors in a relatively short period -- perhaps before the banks are ready to stand on their own. That raises the risk of a second round of failures.

You can’t blame the FDIC for worrying that private-equity investors could be hunting for a fast buck. They’re supposed to be opportunistic investors, after all.

Besides BankUnited, private-equity buyers also scooped up failed IndyMac Bank of Pasadena earlier this year.

Most failed banks are merged into other banks, but private-equity buyers broaden the pool of potential bidders, which in theory could mean a savings to the FDIC in disposing of troubled banks.

Eighty-one banks have failed this year, and the FDIC’s deposit insurance fund is running low -- though it can’t run dry because the agency has a $500-billion credit line with the Treasury. The FDIC also can continue to raise insurance premiums for healthy banks to replenish the fund.

-- Tom Petruno

Photo: FDIC Chairwoman Sheila Bair. Credit: Andrew Harrer / Bloomberg News