Um, let’s not give private equity all the banks’ keys
1 comment May 23rd, 2009
Federal regulators kept their word last week, seizing Florida-based BankUnited, the biggest bank failure this year, one that puts the Federal Deposit Insurance Corp. on the hook for around $5 billion.
The feds set a Tuesday deadline and waited for bidders to come forward, but the pool was limited. Even given the state of the banking industry these days, BankUnited had dug itself into a pretty deep hole, including a loss of more than $1 billion in 2008.
And, when regulators moved in Thursday, the bank was handed over to a group of private-equity firms.
Pay attention, folks. I can’t help but worry that a fox has again been put in charge of billions of chickens.
It was unavoidable, really. The feds have so far resisted significant investment from private-equity firms in the banking industry. But the companies have been circling weakened financial institutions like sharks, looking for their opening.
To be sure, there are some advantages to giving private equity a seat the banking table. It would allow collapsed institutions access to the $400 billion to $600 billion in equity money, advocates say. In BankUnited’s case, the group of private-equity managers agreed to pump $900 billion in new capital and acquire more than $20 billion in deposits and assets.
But the Federal Reserve has some problems with the idea of private equity owning banks. So do I.
Private-equity firms, by their nature, are risk-takers.
They’re informally known as the gravedancers of the economy — scooping up struggling companies by using a lot of debt and little cash, reorganize (known informally as “layoffs”), then sell to someone else, pocketing the profit.
Consider, for example, the risks taken by Cerberus Capital Management, the private-equity firm that took over Chrysler and an ownership stake in GMAC Financial Corp.; both have needed billions in federal bailout money to keep the doors open. Or Sam Zell, the billionaire Chicago investor who grandly swept Tribune Co. into bankruptcy within two years.
And the Fed is still trying to patch up the industry after one of the worst financial crises in history. I’ll forgive them for not being altogether sure that these guys will be the best stewards of other people’s money.
So far, eager private-equity players have managed to work around the Fed’s rules — the sale of IndyMac, the failed California thrift, worked the same way as that of BankUnited. A group of private-equity firms each bought up to their legal limit, with each firm’s piece adding up to 100 percent of the bank.
Here’s the problem: Banks are supposed to be boring, staid and stuffy institutions managed by well-modulated executives. That they got themselves into trouble by acting more like casinos is one of the things that got us here.
And private-equity companies like casinos better because they make more money faster.
It strikes me as a marriage bound to fail somebody — probably the bank’s customers.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
