Wilbur Ross: FDIC Meeting Was “Highly Productive”

FDIC chair Shiela Bair today held a five-hour, closed session with select members of the private equity industry, to discuss proposed rules that would govern future PE investment in banks. To say that many of these rules are unpopular with private equity pros would be an understatement, particularly capital requirement and cross-guarantee provisions. As Wilbur Ross accurately told the WSJ last week, the guidelines are “harsh and discriminatory.”

So it was with some surprise that Ross was even one of the 26 invitees to today’s roundtable, let alone asked to lead the section on capital requirements. He left with his strong objections intact, but also believing that the meeting was “highly productive.”

“Sheila Bair seems truly interested in getting people’s views,” Ross told me during a phone conversation earlier tonight. “It was pretty obvious what my reaction had been, but she still had me chair part of the conversation and seated me next to her at lunch. I think it shows that the proposals really are still proposals at this point, and that she and others at the FDIC are serious about wanting input from people in the private equity industry.”

Ross says that the private equity pros were united in their opposition to the following three proposals:

  1. PE-owned banks would be required to have a “Tier 1” leverage ratio of 15% for three years. “There’s no bank in the country with that ratio,” Ross says. “They should look at the stress tests they did, see what the ratios were there of ‘healthy’ banks, put in a bit of margin for cushion and then give us that number — which I bet wouldn’t even be half of 15%.”
  2. Cross-Guarantees, which basically means that a PE firm with mutliple bank assets would be required to use its healthy banks to prop up its unhealthy ones. “I told them that our partnership documents would prohibit us from doing that, and that I’d think most other firms would have similar prohibitions,” Ross says. “They [the FDIC officials] seemed surprised by that.”
  3. Ban on PE firms selling bank or taking it public in first three years after purchase. “I’m okay with some sort of holding period — you can’t turn around a bank in 10 days anyway — but why prevent the bank from being allowed to raise capital, if it’s available and helpful?”

Ross adds that he and many others were okay with several other proposed guidelines, including increased disclosure requirements, banning PE firms from bidding on one of its own failed banks after it fails and a prohibition against PE firms using their banks to support other portfolio companies (basically a buyside-flipside of the cross-guarantee issue).

Today’s meeting did not allow for formal recommendations, as those can only be made in open session. The FDIC has, however, opened a 30-day comment period on its proposals, and Ross says he expects most of today’s attendees to submit formal letters.

“The FDIC didn’t have to even put any of this up for discussion,” he adds. “They could have just made it official and been done with it. The fact that they didn’t suggests to me that they’re interested in learning more and making better policy.”