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Private Equity's Banking Problem


Here’s a follow on to yesterday’s post about private equity playing in the banking sector from our finance colleague and guest blogger, Peter Carbonara:

One deal that people in private equity keep telling the press about, but has yet to actually happen is the purchase of Florida’s BankUnited, the state’s largest. Carlyle Group, WL Ross and numerous others have been named as potential bidders for the ailing bank. Both Ross and rival JC Flowers have already bought small banks in Florida to stake out position for bigger prizes down the line. People close to the Bank United negotiations say a deal could be announced as early as this week, but they’ve been saying that for months. The bank needs capital and the PE firms want to invest. So why the hang up?

The problem may be coming up with ownership structures that will satisfy regulators. The Federal Reserve, which regulates nationally chartered banks, is required by law to limit controlling positions above 25% in banks only to bank holding companies, entities that do nothing but run banks. PE firms don’t want to become bank holding companies, with all the regulatory scrutiny that comes with that, so they’re looking to do so-called “club deals” for banks. Several PE firms would go in on a bank together, with none of them holding a controlling position.

The rules about who can own a bank, however, don’t seem hard and fast and that uncertainty maybe gumming up the works. The Office of Thrift Supervision, which regulates thrift institutions, was willing to let NY PE firm Matlin Patterson buy a controlling stake in Flint, Michigan’s Flagstar thrift without requiring Matlin to become a bank holding company. OTS was satisfied by a “silo” arrangement, in which the firm’s bank investment was segregated from its other holdings.

Is the FDIC taking a harder line? Lawrence Kaplan, a former OTS regulator who now represents PE firms, banks and others for law firm Paul Hastings, says, not necessarily. He says both regulators are looking at potential deals extremely closely on a case-by-case basis. “It’s a real proctology examination,” he says.

Indeed, both regulators can be brutal when it comes to banks deals, he says. Kaplan talks about one recent negotiation that ended without a deal when the private equity firm finally got fed up with the volume of regulatory questions from the OTS. “They said, it’s a $25 million deal. Enough already.”

Kaplan says the regulators he’s dealt with at both OTS and the Fed are very aware of setting precedent. The Bank United deal, if it ever happens, he thinks, may set a template for future private equity deals for banks.


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