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PE bank rules–now that’s news

July 1, 2009

Glad to hear the FDIC is getting close to issuing tough rules for allowing private equity firms to buy the assets of lenders taken over by the regulator. The Wall Street Journal reports on the development today.

Then again, none of this is really news to readers of this blog. Back on June 18, I reported that FDIC Chairman Sheila Bair had sent a letter to Rhode Island Sen. Jack Reed saying the regulator was in the process of developing “applicable policy guidance” for prospective investors. (A hat tip goes out again to Freedom of Information Act requester extraordinaire Ken Thomas for unearthing the Bair letter).

Bair and the FDIC are looking at setting higher capital contribution levels for PE buyers and preventing PE buyers from flipping a bank and cashing-out for at least 18 months. Indeed, that’s the timeframe the FDIC imposed on the PE consortium that bought Florida’s BankUnited.

Personally, I think PE buyers should be barred from heading for the exits for at least two years–maybe even 3 years. After all, many PE investors are barred from taking money out of a fund for a minimum of three years, and in some cases even longer.

There are plenty of reasons to be wary of PE firms buying up banks assets. But with PE firms sitting on some $400 billion in unallocated investor money, there’s simply too much pressure on regualtors to shut the door on PE buyers.

Let’s hope the rules Bair finally announces are tough enough to protect bank depositors and taxpayers.

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