July 16, 2009
Private Equity Under Attack, Again
The FDIC has announced that private equity buyers will be penalized if they purchase failed banks in distress sales by the FDIC. Private equity will have to put up more capital and make more guarantees. The FDIC does not want private equity to make money on failed bank turn-arounds. The favored buyers are other operating banks. This will of course discourage private equity buyers from putting new capital into failed banks, concentrate the banking industry, encourage private equity to buy healthy operating banks to participate in the market for failed banks, and, finally, encourage domestic private equity to seek overseas investmets. Each of these developments is not healthy for a recovery of the American economy. Worries about private equity capitalization should be addresses through traditional attribution and "look through" rules (the definition of affiliate) for buying syndicates, not this.
July 16, 2009 | Permalink
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The FDIC is appropriately trying to prevent capital regulated banks from migrating into the non-bank sector which is not regulated and much more prone to failure. The magnitude of the failed bank problem is so small (0.3% of commercial banking assets in failed institutions so far this year), the the need for capital is outweighed by the regulatory concern of repeat bank failure.
The FDIC insured 8,305 commercial banks and savings institutions with a total of $13,847 billion in assets at the end of 2008. In all of 2008, 98 new FDIC banks were established, while 25 failed and 5 were involved in "assistance transactions." 99.6% of FDIC commercial banks and savings institutions didn't fail or require FDIC assistance in 2008, and "problem banks" (a much larger category than failed banks) made up just 3% of all banks with less than 1.2% of the assets of FDIC insured banks.
So far in 2009, 53 banks have failed and required FDIC intervention, and those institutions had total assets of roughly $35 billion (about 0.3% of the assets of all FDIC insured banks).
In contrast, the vast majority of independent mortgage finance companies making subprime loans, many doing hundreds of millions or billions of dollars of business each year, are no longer in business, and all of the free standing investment banks in the U.S. have gone out of business or been acquired by other types of institutions as more highly regulated divisions.
Posted by: ohwilleke | Jul 16, 2009 5:20:54 PM