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Bair: Banks Should Have Inside Track On Deals
Really? What good does that do the FDIC?

Thomas Brown ( about me )
Posted 07/08/2009
bankstocks.com
tbrown@bankstocks.com

It turns out the reason Sheila Bair plans to impose such idiotic, draconian restrictions on private equity investors—a minimum 15% Tier 1 capital ratio, for instance, and cross-collateralization of a PE investor’s bank holdings—is that she wants existing banks to get first crack at doing deals. That’s the conclusion, at any rate, of a participant in a meeting of bankers and PE types Bair held in Washington on Monday. From the New York Post:

Part of what may be behind Bair's push to support banks buying their fallen brethren, the participant said, is that there are too many banks and that the FDIC wants to encourage consolidation to address that issue. And now that many larger banks have been successful in raising capital in recent months, they may be in a position to step up.

"I think the FDIC will start to focus on how to make it easier for banks to buy banks," the source said. [Emph. added]

This makes no sense—either for the banking industry or Bair’s own agency.

Can we back up for a moment? Sheila Bair runs the FDIC. The job of the FDIC is to insure bank deposits, and to minimize losses to the government when banks fail. From her perspective, then, the more private capital there is invested in the banking business (and thus in place to absorb potential losses ahead of the government), the better. This isn’t complicated. She should be encouraging PE investment in banking, not throwing up roadblocks to it.

But she’s not, and I don’t quite understand why. Maybe she thinks all PE investors are some sort of Wall Street gunslingers. So what? Bair’s agency passes judgment on all private investments in banks, anyway. She could simply keep the undesirables out, deal by deal. Or she could require PE investors to partner with managers with banking-industry experience, as Wilbur Ross did with John Kanas. But I don’t see how systematically disadvantaging one class of investors does anything to strengthen the banking business or help the FDIC’s own loss profile.

As I say, I don’t see what Sheila Bair is up to. And I especially don’t see why the Treasury Department, whose policy seemed not so long ago to be that banks can’t have enough capital, no matter how much they already have, is going along with these nutty new barriers Bair has decided to put up.

What do you think? Let me know!

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Comment:

PE INVESTOR Posted On 7/8/2009 8:07:35 PM

Amen. This is silly, the FDIC is starting from a silly perspective. let me give 2 (biased) points. 1) The ultimate source of capital for the PE firms (endowments, pensions etc) are the same people who give money to the public money managers! Its the same underlying capital. PE funds are set up to be more active stewards of the capital than the public guys....but its the same underlying source of capital. 2) She is implicitly (or almost explicitly) saying that the incumbent banks and incumbent managers know what they are doing and the PE firms are evil and will corrupt the system. Guess what, the banks that have failed (and are failing) don't have any PE funds (or any large PE funds, there are some small ones out there) as large investors! The PE funds didn't cause this mess...THE EXISTING BANKS AND THEIR EXISTING MANAGERS DID! Now you want to come out with regulations that favor one group over another and the group you are favoring is the group that did CRAZY spec real estate lending (and isn't brining fresh capital into the system) ! Come on, give me a break. Lets keep one set of regulations for all the banks and not try to paint one group as the 'evil speculators" Seriously, give me a break. We want to invest several hundred million into the banking system and for some reason my capital isn't good enough? Crazy.

ACEMAN Posted On 7/8/2009 11:43:42 PM

Y'all know this is not "silly", but a true takeover of the underpinning of competitive banking capitalism. In truth the Obama folks seem to be emulating 19th century British mercantilism: whether it is banking, corn or cotton or ship building, the administration does not want competition because it has created barriers to entry to off-shore bankers and private equity and thus will choose who it wants to be in control of the banks and thus gain control of a majority of US banks. By doing so it will then use these banks for the administrations economic and social policies and to send a message to Europe and China to keep its hands off US banks. "So does that tickle you, or scratchle you?"

rs Posted On 7/8/2009 11:48:30 PM

Sheila Bair is an idiot and leech on the productive members of society. That's why she works for the govt.

mopedman Posted On 7/9/2009 1:53:22 AM

Makes the same sense as encouraging banks to get bigger in this ongoing crisis and then talking about making them carry more capital if they do which..tells them to get smaller again. Kind of like..load bombs on the planes..change the bombs to torpedoes..why we don't know where they are..OK lets go with bombs and hit Midway..hey what's that up there? The American dive-bombers had caught them with almost all their planes still on the carriers. After having skillfully worked that in I'd like to point out that not one but two governments have been involved in this and both are in competition with each other to appear to have failed the least and both will do so at our expense. Right in the middle of this mess why don't we go with Carbon Cap and Trade and further boost the economy by putting the main burden of Healthcare squarely on the back of the middle class which is currently out of work. Not to worry because this giant ship is unsinkable. Hang on I think I see something out there. Naw it was just the fog.

jsc173 Posted On 7/9/2009 7:40:10 AM

Bair has been trying to muscle her way back to the level of prominence she enjoyed in the last administration. There was a sort of Paulson's the investment banker, Bair's the banker division of labor in the Bush adminstration and her word always got the attention of the media and the industry. No longer, so she needs to take some kind of a stand that is controversial, even if it's insane. In fact, I think she's tipped her hand on this one. Quite frankly, Tom, my take is the FDIC is acknowledging they can't adequately regulate banks today. Put a bunch of smarter than the average banker PE guys in the boardroom and who knows what they'll come up with to make money? Can't trust 'em. Not smart enough to effectively regulate 'em. Just make it too expensive for them to enter the market. Great. If they're out, who's waiting in line behind them? Uh. Nobody? That's what I thought.

"Ned" Kelly Posted On 7/9/2009 11:08:13 AM

PE INVESTOR: National City Corporation most assuredly had private equity. Sheila Bair's job is to protect the taxpayer from having to fork over even more dough because a traveling salesman ( a/k/a a private equity investor ) "flew too close to the sun." Private equity firms have investment horizons measured in picoseconds— that is the antithesis of true, long-term investment. The perverse incentives of private equity investors are similar to the perverse incentives created by still-improperly-accounted-for management stock options— one of the worst business practices ever widely implemented. The damage done to the U.S. economy by short term thinking ( and subsequent behavior ) is incalculable.

Chris Bolles Posted On 7/13/2009 8:07:22 AM

It's a matter of philosophy and context. We live in a real world, have real jobs, and must produce concrete results that sell. If we don't, we fail. It is as simple as that. The current administration and congressional leadership embraces a far-left philosophy because they do not face the same realities. They live in a world where what sounds good sells. They are held responsible for the failure of public relations only, not the failure of their product/policy. Having lived among those in the same environment, I can tell you this: Do not underestimate their willingness to do the absurd, no matter how obviously insane it appears to you. When you fight them, be prepared. Honor is not in their vocabulary.

Erich Riesenberg Posted On 7/13/2009 11:25:13 AM

Thank you Chris for that chilling depiction, of what in fact may be the political process throughout the entire world! Might be!

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