The government has made plain that it wants private capital to flow into the banking industry. It is so emphatic on the matter, in fact, that it even forced a number of institutions to raise not-insignificant amounts of capital, on not-so-great terms to existing shareholders, after the stress tests this spring.

Yet at the same time, there’s no shortage of private capital, in the form of private equity funds, sitting on the sidelines clamoring to get in to the banking business. 

A match made in heaven, right? So then why has the Dragon Lady of the FDIC, Sheila Bair, thrown up one roadblock after another to prevent private equity investors from supplying the capital to the banking industry that the government itself insists the industry so urgently needs?

It’s crazy. Bair seems to not want private equity anywhere near banking, for some reason. Initially, you may recall, the FDIC proposed that institutions controlled by PE funds maintain a Tier 1 capital ratio of 15%--roughly twice the level required of other institutions. And Bair proposed mandating that PE funds hold their bank investments for a minimum of three years. She also floated the idea (perhaps worst of all) that banks controlled by a single PE firm be required to cross-guarantee each others’ liabilities. 

It was all tantamount to telling the industry to take its money and go home. Wilbur Ross was making an understatement when he commented on Bair’s plan that, "I think it could guarantee that there will be no more private equity coming into banks."

Bair finally backed off—but not completely. According to the FDIC’s latest proposed rule, banks controlled by PE firms would still have to maintain a Tier 1 ratio of 10% rather than 8%. Which is to say, Bair still wants PE funds to operate under a systematic disadvantage.  

What is it with Sheila Bair and private equity investors? Did she have a bad date with one in college? Somebody seems to have plunked the idea into her head that private equity investors are somehow dumber, or less competent, or less ethical than other bank investors. Why she seems to believe that, I have no clue. But if she really does think private equity is overpopulated with bad apples, she has a perfectly adequate remedy that doesn’t require any new crazy, punitive rules. She can simply disallow bank investments by firms controlled by individuals she deems unacceptable. Simple.

In the meantime, it makes no sense for one set of investors to be put at a disadvantage to others for no reason—particularly since the government seems should be eager to attract private money to help it resolve troubled institutions. Under the current situation, Bair isn’t part of the solution; she’s part of the problem. 

Sheila Bair’s tenure at the FDIC has been marked by one terrible decision after another, related to everything from ILC charters, to payday lending rules, to loan modifications. And now, this. The sooner she’s gone, in my view, the sooner the problems facing the banking industry get fixed once and for all.

What do you think? Let me know!