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Friday's Wall Street Journal makes the obvious point ($) that the banking industry has had to raise an enormous amount of new capital—with more infusions still to come—as part of a solution to the current banking crisis. The banks know that they need the cash; regulators are insisting that they go out and get it.
Happily, banks have so far had little problem raising the money they need. Yet one wonders why the new capital has come almost exclusively from foreign sovereign wealth funds, in places like Abu Dhabi and Singapore , rather than from private equity investors here in the U.S. It’s not as if domestic institutions don’t have money to put to work, after all—or that they have an aversion taking risk. Why are U.S. investors MIA?
You can blame, at least in part, government policy and regulations. The two basic problems are:
Control provisions. Current U.S. regulations seem nearly custom-designed to prevent U.S. institutions from investing in the U.S. banking business in any meaningful way. In particular, current rules treat any investment in a commercial bank above a 9.9% stake (and sometimes above 4.9%) as a control position, which would then require the investor to register as a bank holding company. That would in turn effectively prohibit the investor from investing in non-bank activities and impose other myriad restrictions, as well. No private equity investor can reasonably live in such a regulatory straitjacket.
Source of strength. What’s more, if you do become a bank holding company, you must agree to provide the bank with an open-ended “source of strength,” in regulatory parlance. Translation: you’re on the hook unlimited future capital commitments, if needed. That’s right--unlimited. What investor would agree to such a potentially mammoth contingent liability? None. The recent Blackstone-Alliance Data Systems deal collapsed on just this point.
And yet these control-provision and source-of-strength rules don’t apply to sovereign wealth funds for some reason. Why not? I suppose that the big banks are so desperate for capital right now that regulators are willing to give the foreigners a pass or just look the other way. That’s fine. Then again, why should one set of rules apply to non-U.S. investors, while a different set of rules—which are especially onerous, by the way—apply to U.S. investors?
What do you think? Let me know!
/VWH/
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