TPG-WaMu Transaction Shows Lunacy in OCC Notion of 'Controlling Shareholders'

Why are bank investors different?

TPG invests $7 billion into failing Washington Mutual (WM) --a thrift regulated by the OTS.

Because of that regulatory idiosyncrasy, TPG has reason to be happy. The firm will not have to become a bank holding company, will not be hamstrung by the restrictions on ownership or activities that BHC status would bring, and will not become an open-ended "source of strength" should WaMu need further capital infusions.

None of this would have been permitted if WaMu were a commercial bank. In that case, TPG would have faced regulatory restrictions so severe that it surely wouldn't have gone ahead with the deal. If TPG had bought even a 10% stake in an OCC-regulated WaMu, for instance, the firm would have been deemed a controlling investor, and so would have had to convert to a BHC, with all the operating restrictions that that entails. A deal killer, in other words.

This is nuts. Banks need capital at least as badly as thrifts do. Only so many JPMorgans and BofAs are available to acquire troubled institutions. Sheila Bair says she believes ($) the current regulatory rules haven't been an "impediment" to banks' capital-raising efforts. That's true--and misleading. So far, sovereign investment funds (which for some reason aren't subject to regulatory scrutiny) have been willing providers of new bank capital. But why should foreigners be the only ones to have access to deals that could turn out to be very attractive in the end? If nothing else, easing restrictions would broaden the pool of potential investors and presumably lower what banks would pay for any new capital they raise. Regulators surely would be in favor of that.

When are legislators and regulators going to wake up and change the crazy control rules so that the banking industry can raise the new capital that it so desperately needs? The current restrictions make no sense at all: what practical reason, after all, can there be that a 24.9% ownership doesn't constitute a control position at an insured thrift but does at a commercial bank?