Private Equity Acquiring Failed Banks Is A Bad Idea

As two articles this week make clear, my Quixotic crusade to stem the tide of private equity into the banking industry is coming a cropper.

I wrote a couple of posts over the last few weeks (here and here) decrying the cave-in to the PE industry’s pursuit of banks. Since then Bank United (BKUNA) and First Southern Bancorp (FSOF.PK) have fallen into PE’s clutches and it’s looking more and more like this battle has been fought and lost with very few shots having been fired. That’s what happens when one side [PE] has what the other side (the bank regulators) desperately needs (capital).

Both Business Week and The Deal Journal are out with articles that pretty much concede that PE is going to be major buyer of failed banks from the government. The Deal Journal article takes it one step further and notes that the recent purchases represent toeholds which the PE guys are likely to use to launch acquisition campaigns aimed at building regional banking powerhouses.

To its credit, Business Week points out the dangers of allowing this camel’s nose under the tent. Specifically, that the country pretty much banned commercial ownership of banks in the 1930s after the abuses that arose from such control. The predictable argument now is that the lesson was learned and the new PE owners won’t use their banks to finance their own deals. Sure! (For a counter argument see this post by John Hempton).

As the articles point out- as have I, these acquisitions are being arranged like shotgun marriages. There appears to be no common approach among the various regulatory authorities as to how the acquisitions are to be structured and what, if any, restrictions are to be placed on ownership. In fact, the PE firms have shown a talent for regulatory arbitrage in seeking to cut the best deals for themselves.

While I will continue to think that this is a bad idea, I would be happy to abide with any final regulations that ensued from a rigorous debate about the probity of allowing PE firms to own banks. I don’t mean a discussion among regulators, I do mean some meaningful debate in the halls of Congress. Ownership of banking by commercial firms represents a major philosophical shift in our regulatory scheme. It’s a policy change that ought not be left to technocrats.

Congress, however, is playing its usual game. Stay away from the tough decisions lest you have to defend a vote at some point in the future and preserve your ability to express shock and dismay and assess blame when things go wrong. At all costs, abdicate your responsibilities.

I’ll probably chew on this bone a couple more times but the outcome is pretty obvious, don’t you think?

Comments

[Gregman2:]

How much did Cerebus cost U.S. taxpayers? The bottomline here, if the failed bank refails due to undercapitalization (or being stripped of reserves) will taxpayers be asked to rebailout the bank?

Jun 07 01:26 PM

[carey_jim:]

Tim, you are starting to sound like a voice crying in the wilderness again.

You know, as well as anyone, that the world doesn't listen to reason, even if it makes a great pretense that it does.

The world lurches along by necessity, impelled by obscure laws of human nature, and tethered to technological advances.

We all need to reread Bohm-Bawerk, Le Bon, Pareto and Freud, among other great thinkers in economics, sociology and psychology from the past. We don't have the luxury of rediscovering their hard won truths.

In 1939, at age 83, Sigmund Freud, an old Jew, watched in horror as the irrational forces of Nazism overwhelmed Germany and more than six million of his fellow Jews were herded into concentration camps.

Freud had dedicated his life to the proposition that man's irrationality must be replaced with reason, as much as possible, and he placed his hopes in his creation, psychoanalysis. It wasn't a process direct exhortations to be reasonable, but a long, slow process of self-knowledge with the goal of balancing irrationality with reason.

The picture of British Prime Minister Chamberlain waiving a piece of paper signed by Hitler in 1936, and proclaiming "peace in our time" should convince all of us that history does not accept simple, reasonable solutions but all too often moves along with blood and tears.

Keep the faith.

Jun 07 05:38 PM