Private Equity To Save Banks? Without Fed Regulation?

It’s been well known that private equity firms are a viable white knight for banks who are temporarily troubled but may be good bets long term. So if they take majority stakes in banks, are they subject to the same rules as banks, or is this an end-run around the rules? According to a Bloomberg report, it’s the latter. Ownership provisions set forth by the Office of Thrift Supervision are in conflict with a Fed rule that says private equity firms that are majority-stakeholders in banks must be regulated as banks. And if there is a way around regulation, open market competition will find it.

The OTS, which oversees about $1 trillion of assets at U.S. thrifts, approved MatlinPatterson Global Advisers LLC’s purchase of Flagstar Bancorp Inc. in Troy, Michigan, and may allow similar takeovers. That puts the agency at odds with the Fed, which has told private-equity companies it won’t permit a firm that isn’t regulated as a bank to own a majority stake in a lender, even if it walls off its investment in a so-called silo deal, according to a Fed lawyer who declined to be identified.

…Blackstone Group LP and Carlyle Group, the world’s two biggest LBO firms, are among those eager to snap up banks on the cheap after global losses tied to the credit crisis topped $1.4 trillion and slashed the valuations of lenders. While the Fed has set out guidelines that allow private-equity investors to increase their minority stakes in lenders it regulates, it has taken the position that conflicts exist when an LBO firm owns a bank and non-banking interests, said two people with knowledge of the matter.

The Fed oversees national banks chartered by the government. The OTS is an office of the Department of Treasury that regulated 818 thrift institutions, including savings and loans and credit unions, as of the end of 2008.

The OTS is open to more acquisitions, like the Flagstar takeover announced in December, said Grovetta Gardineer, the agency’s managing director for corporate and international activities, in an interview.

…While thrift-industry assets at banks regulated by the OTS dropped 25 percent last year after three collapsed, including Seattle-based Washington Mutual Inc., the largest U.S. bank to fail, Gardineer said the agency isn’t approving private-equity proposals to stem the decline. Fees from assessments on regulated institutions accounted for 92 percent of the agency’s funds last year, according to its annual report.

…Regulators have allowed individual investors to buy banks, even if they also run private-equity firms, as long as they do it with their own money.

…Silo deals were proposed as a way of allowing a private- equity firm to control a lender by keeping the bank separate from its other investments. While the Fed and OTS share their views about bank takeovers, the agencies operate under different statutes and recognize that they may have different opinions on silos, according to people familiar with the regulators.

“Under current law, a silo structure is the only possible way a private-equity firm that also controls non-financial companies could acquire control of a bank,” said Joseph Vitale, a partner at New York-based law firm Schulte Roth & Zabel LLP who advises LBO firms on investments in financial institutions.