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Sheila Bair on PE Bank Investments: “Unmoved” or “May Relax”?

The final version of the FDIC’s proposed rules for private equity investments in banks won’t take effect for at least a month, but that won’t stop news organizations from digging around.

Today the NY Post contradicted our report from yesterday which quoted Wilbur Ross calling the FDIC roundtable discussion “highly productive.” Ross seemed hopeful that the FDIC would grant a few concessions on the agency’s strict proposed rules.

The Post took a different bent, painting FDIC Chairman Sheila Bair as “unmoved” by the buyout firms’ pleas. Citing an anonymous source, the story said “regulator has made her mind up when it comes to PE firms buying banks: Thanks, but no thanks.”

Then Bloomberg News weighed in, reporting that the FDIC “may relax” its proposals, according to anonymous sources. Methinks that Bloomberg, and Wilbur Ross, are closer to the truth than the Post.

The Post suggests that Sheila Bair doesn’t actually want private equity firms to invest in banks. The idea being that there are too many banks and Bair wants to encourage banks to buy each other, rather than have private equity step in. Plausible, I suppose, but why would Bair even host a roundtable discussion, or even propose the guidelines to begin with? Why not just mandate the unattractive rules?

Lawrence Kaplan, of counsel at Paul Hastings and former general counsel to the Office of the Thrift, called the idea a conspiracy theory. The FDIC must find the “least cost” resolution for failed banks it has taken over, he explained. With private equity in the bidding pool, the bank will sell for a higher price and ultimately be a lower cost for the FDIC. Purposely excluding private equity would go against that principle, he said.

Furthermore, Sheila Bair and the FDIC board members have made it clear in public statements that this is an “opening salvo,” and that the agency is interested in feedback from buyout firms. She told Forbes: “We want input … we want to make sure we’re striking the right balance here.” The comment period for feedback lasts a month.

Kaplan, like Wilbur Ross, said the most likely, and most important, compromise will come in terms of the 15% capitalization requirement, which is much higher than what is required of any strategic buyer and prohibitive of buyout firm investments. “I think they’ll realize that capitalization requirements may have to be on a case by case basis, in line with the other de novo policies,” he said.

Kaplan raised his own concern that these guidelines only apply to failing banks and don’t address the topic of underperforming banks which have not been taken over by the FDIC. Buyout firms can freely buy stakes of less than 25% in any bank, but Kaplan said he’s concerned that “regulatory creep” from the new guidelines might begin to effect those types of investments as well.

How Will Tomorrow’s Financial Regulation Announcements Affect Private Equity?

Wilbur Ross: FDIC Meeting Was “Highly Productive”

FDIC Proposal: All Stick, No Carrot

Private Equity Group To FDIC: Try Again

FDIC Proposes Tough Private Equity Guidelines