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Bair on PE bank deals: “We will get this right.”

June 18, 2009

The idea of the strip-and-flip crowd a/k/a private equity firms buying distressed banks out of government receivership raises a lot of dicey issues. But with federal regulators approving three such transactions this year and more bank failures on the way, get used to the idea of PE banking.

Last month Rhode Island Sen. Jack Reed, a member of the Senate Banking Committee, sent a letter to regulators in which he raised some concerns about these deals. Now at least one regulator, FDIC Chairman Sheila Bair has responded.

In a June 5 letter, Bair tells Reed that she fully expects PE firms to keep bidding on failed banks and her agency is in the process of developing “applicable policy guidance” for prospective investors. In the letter, she notes the FDIC has already imposed “resale restrictions” on the two transactions it has approved. For instance, she says the group of PE firms that bought BankUnited, a failed Florida thrift, can’t sell a controlling interest in the new bank for 18 months.

Bair’s response to Reed was obtained by Wharton finance lecturer Ken Thomas, a dogged Freedom of Information Act filer.

But the most intersting part of Bair’s response wasn’t the actual text of the two-page letter. It was a handwritten memo, Bair apparently wrote next to her signature. In it she says: “Good chatting with you. We will get this right.”

That’s good to know. But then again, shouldn’t that go without saying. Isn’t it the job of regulators to get it right in the first place.

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