The FDIC is struggling to combat this year's wave of bank failures, and its insurance fund may be tapped out by year's end. As we saw with the failure of Austin-based Guaranty Bank last week, the agency is now more willing to consider foreign banks as bidders for failed institutions.
With its insurance fund dwindling, the FDIC has apparently decided it can't afford to be so picky about potential buyers. Yesterday, its board voted to ease requirements for private equity firms to buy failed banks. It lowered the minimum amount of capital that private-equity investors must maintain for three years after buying a bank.
But the requirement is still twice as much as the capital requirement the FDIC set for banks to be considered well capitalized. The move drew a tepid reaction from the Private Equity Council, which is sort of like a trade association for hedge funds:
The revised FDIC guidelines represent an improvement over those originally proposed in July. But we continue to question the need to impose more onerous capital requirements on private equity firms that invest on behalf of retired police officers, firefighters, teachers, and other public employees.
The council argues now is not the time to be discouraging the influx of capital into the troubled banking industry. Perhaps not, but it's the subsequent outflow that the FDIC seems worried about. Hedge funds, after all, buy distressed companies, squeeze out costs and sell them again for quick profit. It's one thing to do that with, say, manufacturing firms, but quite another to be flipping banks.
Certainly, hedge funds broaden the pool of potential investors and might enable the FDIC to get a better price.
But the council's statement is disingenuous. Hedge funds aren't buying banks on "behalf of retired police officers, firefighters, teachers, and other public employees." They're buying them for the same reason they buy everything else: potential returns.
Sure, public pension funds have loaded up on private equity investments, but that strategy hasn't worked too well for them. Ask those civil servants if they think buying failed banks is a good way to invest their retirement.
The FDIC isn't in the investor protection business, but its hard line with the hedgies may ultimately do more to help retired public servants than the banks it insures.
Disclosure: no positions