Thoughts & Comments
Sheila Bair's Strange Obsession With Private Equity
The government wants private capital to enter the banking industry. PE firms have it. What's Bair's problem?

Thomas Brown  ( about me )
Posted 08/05/2009
bankstocks.com
tbrown@bankstocks.com

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!


  Add your comment

 

 

Burton A. Johnson, President. Burton A. Johnson P Posted On 8/5/2009 2:03:28 PM

Tom, You should know by now that government is always the problem, especially under the current administration. Burton Johnson

Erich Riesenberg Posted On 8/5/2009 2:12:42 PM

"What is it with Sheila Bair and private equity investors? Did she have a bad date with one in college?" What happened to you? You seem a bit pitiful now.

Former Banker Posted On 8/5/2009 2:42:05 PM

Tell it, Tom.

czhv18a Posted On 8/5/2009 2:50:58 PM

Unfortunatley, she is being hailed as a great regulator. Larry Kudlow on his show, made positive comments about what a great job she was allegedly doing long ago, and her name had been raised as a possible (gulp) treasury secretary before. I guess Geithner was a better (gulp) candidate.

jsc173 Posted On 8/5/2009 3:40:07 PM

If you look at who's buying loans and REO from the FDIC it appears to be mostly private equity firms. So if she's content to sell them the assets of seized banks at substantial discounts (direct hits to the FDIC fund), why wouldn't she "sell them the bank" and take a much smaller hit? I can confirm that there are no other deep pocket investors in the market who aren't already "full" and none of the big/regional banks are interested in doing anything other than trying to figure out how to make money with what they already own -- forget about new acquistions by those guys. So, if she won't play ball with the PE buys, exactly who does she think will bring money to the table?

Tad Gage Posted On 8/5/2009 4:02:41 PM

There is obviously a fundamental disconnect between the desires of the administration and congress and the regulatory agencies. I think the regulators -- who, let's face it, are career compliance-oriented folks (like they did such a good job monitoring compliance before the financial meltdown!) -- are now tasked with a different set of objectives and they have no idea how to respond. What's their inclination? Develop more restrictive rules within the standard regulatory box with which they're comfortable, and then, like a proud five year old with a crayon drawing of purple trees, point to it and say "see what a great a great job I'm doing?!" The directive from "on high" is good, but the people tasked with executing a new plan have no skills to do it.

elee Posted On 8/5/2009 5:46:27 PM

Vulture funds be damned! The government's already forced enough dilution of existing shareholders.

Banker brother Posted On 8/5/2009 5:47:29 PM

Right on Tom. It's time to bring a successful banker in to the job!!

Former Investment banking practioner Posted On 8/5/2009 6:27:52 PM

She seems to have an insecure person's fear of appearing weak and need to punish those who are not sufficiently obsequious. She tries to offset this with lone-wolf grand non-constructive, punitive proposals. Very typical of someone from academia and the non-profit sector that has never done in practice what she is in charge of fixing. She is still there because she always has a wet finger in the air knowing what sounds good to her 535 masters. So far so good. It could be worse; the FDIC chair could be a fish-out-of-water G. William Miller or, God-forbid, a capitalist, free-enterprise hater like Elizabeth Warren. The latter is really scary. Let's hope this king (er, queen) of the liberal shibboleth never gets real power. Great comments as usual.

rs Posted On 8/5/2009 7:54:53 PM

finally tom brown gets one right...

Chase Banker Posted On 8/6/2009 2:16:06 AM

I think Sheila Bair is doing a great job at FDIC. I echo Warren Buffett's praise for her. I think JPMorgan Chase and other greedy banks are putting up tons of lobbying money against her: See why JPMorgan Chase is the real obstacle to financial reform: http://fchase.ning.com/

Chase Banker Posted On 8/6/2009 2:16:26 AM

I think Sheila Bair is doing a great job at FDIC. I echo Warren Buffett's praise for her. I think JPMorgan Chase and other greedy banks are putting up tons of lobbying money against her: See why JPMorgan Chase is the real obstacle to financial reform: http://fchase.ning.com/

elee Posted On 8/6/2009 7:44:50 PM

Damn the vulture pirates anyway, the government has already done far more than enough to facilitate dilution of bank shareholders.

elee Posted On 8/6/2009 7:45:14 PM

Damn the vulture pirates anyway, the government has already done far more than enough to facilitate dilution of bank shareholders.

bill Posted On 8/7/2009 5:15:00 AM

Totally agree..the sooner the Sheila Bair lovefest ends the better for the country....

"Ned" Kelly Posted On 8/7/2009 2:03:00 PM

The private equity folk are not sources of permanent capital. They are a bunch of promiscuous whore-liars and traveling salesmen totally lacking a scintilla of long term perspective. They are the banking equivalent of residential real estate "flippers" and we've seen where that got us!

silly things Posted On 8/19/2009 9:23:03 PM

Here is an article in NY times that detailed the regulators concern of private equity. http://www.nytimes.com/2009/05/06/business/06equity.html?_r=1&scp=2&sq=private%20equity%20bank%20japan&st=cse Does the article have merit? Please share your thoughts.

Big Time Consultant Posted On 8/24/2009 8:00:27 AM

As a retired regulator who is now in teh consulting business you are aboslutely correct in your analysis and I will even take it one step further - federal regualtors are not allowed to think

greg Posted On 3/4/2010 12:30:17 PM

You are spot on, she is a disaster and it continue to run unabated. The FDIC should be a mutual insurance fund at this moment and invest in banks that were well managed. It could solve the capital issue and resolve the major of bank problems in a true least cost manner. They have shoosen the highest and most damagin manner possible.

greg Posted On 3/4/2010 12:31:16 PM

You are spot on, she is a disaster and it continue to run unabated. The FDIC should be a mutual insurance fund at this moment and invest in banks that were well managed. It could solve the capital issue and resolve the major of bank problems in a true least cost manner. They have shoosen the highest and most damagin manner possible.
Ad for inter-arch
Ad for Bankstocks
 

     Bankstocks.com is a public web site operated by individuals who also operate investment advisory firms that serve as investment advisers to hedge funds (the "Firms"). Some articles are authored by employees of the Firms while others are authored by third parties. Under no circumstances does any article posted on Bankstocks.com represent a recommendation to buy or sell a security. This article is intended to provide insight into the financial services industry and is not a solicitation of any kind. The Firms do not vouch for the accuracy of any information contained in any article posted herein and the views expressed in any article herein do not necessarily reflect the views of the Firms. The Firms buy and sell securities on behalf of their fund investors and may do so, before and after any particular article herein is published, with respect to the securities discussed in any article posted herein. The Firms’ appraisal of a company's prospects is only one factor that affects the Firms’ decision whether to buy or sell shares in that company. Other factors might include, but are not limited to, the presence of mandatory limits on individual positions, decisions regarding portfolio exposures, and general market conditions, and liquidity needs. As such, there may not always be consistency between the views expressed in this article and the Firms’ trading on behalf of their fund investors. There may be conflicts between the content posted on Bankstocks.com and the interests of the Firms. For an explanation of these conflicts, including an explanation of our trading policy, and how we resolve them, click here.

Neither the authors nor any Bankstocks.com team members can provide investment advice or respond to individual requests for recommendations. However, we encourage your feedback and welcome your comments on any of the articles on this site. Neither the authors nor Bankstocks.com has undertaken any responsibility to update any portion of this article in response to events which may transpire subsequent to its original publication date.