Sheila Bair Dismisses Private Equity “Howling”

WASHINGTON/NEW YORK (Reuters) – U.S. bank regulators have “struck a good balance” in their rules on private equity investments in failed banks, despite grousing from the industry, Federal Deposit Insurance Corp Chairman Sheila Bair said on Tuesday.

“I think we’re learning as we go along, but it seems to me at this point, I think we have struck a good balance,” Bair said in an interview with Reuters. “We have had private equity in bidding, subject to our statement of bidding which requires higher capital and requires them to lock in their investment for three years.”

The FDIC in August imposed new rules on private equity groups’ investments that were softened from original proposals, but still included large capital requirements and other provisions to ensure strong funding and a long-term commitment.

The FDIC said strict requirements were necessary to weed out investors looking to make a quick profit off of troubled banks.

Some private equity groups have railed against the rules, claiming the agency is discriminating against the industry and passing over their high bids.

Bair said the FDIC will host a roundtable in Washington in a couple of weeks to discuss the rules with the private equity community, including bidders, lawyers and accountants. The agency also will issue “additional clarifications” about the rules in the next several weeks.

“I know there’s still a lot of howling about it,” Bair said about the rules, while noting that private equity groups often do not have a track record of bank investment, creating the need for the safeguards.

PRIVATE EQUITY “ANKLE WEIGHTS”

Private equity participants say the FDIC’s policy creates an uneven playing field.

“It is very straightforward in terms of the capital cost, you have a higher break-even point depending on what kind of return you’re trying to get,” said Garrett Moran, chief operating officer of the private equity group at Blackstone Group (BX.N), at the Reuters Private Equity and Hedge Funds Summit earlier on Tuesday.

“It is like getting leg ankle weights in a race — it’s a disadvantage. We’re just always trying to figure out how to …win a race with those ankle weights.”

Last week David Bonderman, co-founder of giant private equity firm TPG, said that the FDIC’s rules on private equity investment in troubled banks was scaring off potential investors and accelerating the pace of bank failures.

Regulators have said 2010 will be a peak year for bank failures for this crisis, eclipsing the 140 that failed last year, as banks continue to struggle with bad loans on their books.

Bair, however, said private equity groups are still bidding for failed banks, with these additional rules in place, indicating they are not scaring off all prudent private equity investors.

“I know there’s a lot of complaining about it, but you know, you gotta do what you gotta do,” she said.

“We’re letting them in, we’re letting them bid with some higher standards, and again I think that’s appropriate.”

(Reporting by Karey Wutkowski in Washington with additional reporting by Megan Davies in New York; Editing by Steve Orlofsky and Carol Bishopric)