Bair Wants Banks to Have Inside Track on Deals: Why?

It turns out the reason Sheila Bair plans to impose such idiotic, draconian restrictions on private equity investors—a minimum 15% Tier 1 capital ratio, for instance, and cross-collateralization of a PE investor’s bank holdings—is that she wants existing banks to get first crack at doing deals.

That’s the conclusion, at any rate, of a participant in a meeting of bankers and PE types Bair held in Washington on Monday. From the New York Post:

Part of what may be behind Bair's push to support banks buying their fallen brethren, the participant said, is that there are too many banks and that the FDIC wants to encourage consolidation to address that issue. And now that many larger banks have been successful in raising capital in recent months, they may be in a position to step up.

"I think the FDIC will start to focus on how to make it easier for banks to buy banks," the source said. [Emph. added]

This makes no sense—either for the banking industry or Bair’s own agency.

Can we back up for a moment? Sheila Bair runs the FDIC. The job of the FDIC is to insure bank deposits, and to minimize losses to the government when banks fail. From her perspective, then, the more private capital there is invested in the banking business (and thus in place to absorb potential losses ahead of the government), the better. This isn’t complicated. She should be encouraging PE investment in banking, not throwing up roadblocks to it.

But she’s not, and I don’t quite understand why. Maybe she thinks all PE investors are some sort of Wall Street gunslingers. So what? Bair’s agency passes judgment on all private investments in banks, anyway. She could simply keep the undesirables out, deal by deal. Or she could require PE investors to partner with managers with banking-industry experience, as Wilbur Ross did with John Kanas.

But I don’t see how systematically disadvantaging one class of investors does anything to strengthen the banking business or help the FDIC’s own loss profile.

As I say, I don’t see what Sheila Bair is up to. And I especially don’t see why the Treasury Department, whose policy seemed not so long ago to be that banks can’t have enough capital, no matter how much they already have, is going along with these nutty new barriers Bair has decided to put up.