Clock is Ticking to Finish FDIC PE Policy

WASHINGTON — Pressure is growing on the Federal Deposit Insurance Corp. to finalize rules governing private-equity ownership of banks as it stares down three likely failures.

The agency is rushing to finish the rules while juggling the expected closures of $25 billion-asset Colonial Bank, $14 billion-asset Guaranty Bank and $7 billion-asset Corus Bank.

But some question whether the FDIC's proposal, which private-equity investors call too restrictive, is limiting the pool of potential investors and driving up the agency's resolution costs.

If the FDIC does not act quickly, there "will be ongoing uncertainty about acquisitions of any institution that the private-equity world believes requires federal support, and ultimately a deeper hole to fill in each one of those cases," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc.

At issue is a July 2 proposal that would place tough restrictions on private-equity firms that buy failing banks, including higher minimum capital requirements, cross-investment guarantees and a mandatory hold time that bars private-equity firms from selling a bank for three years. The plan spooked private-equity investors, many of whom said they would not consider doing another deal with the FDIC until the proposal was reworked.

The agency is expected to act quickly to finalize a rule — the comment deadline passed on Monday — but it may not be fast enough to handle the expected failures of Colonial, Guaranty and Corus, all of which have publicly said they are nearing failure.

While the policy remains in limbo, there are growing questions about whether the FDIC will be willing to continue to cut deals separately with private-equity investors. Some observers said the FDIC could be making a mistake if it does not finish its guidance first. "They will certainly be creating a problem for themselves," said Dwight Smith, a partner at Alston & Bird LLP. "A transaction negotiated a month before the policy comes out, and then that transaction is different, it will certainly create confusion as to what really is the precedent. Is it the earlier deal, or is it the policy?"

But other observers said the FDIC will likely have no choice but to cut separate deals with private-equity investors that want to buy pieces of those three large banks.

"The show goes on; they have a bank to deal with," said Robert Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency. "They should feel that they have the flexibility to negotiate a deal that has terms that are considerably different than what was in the proposed guidance."

One potential deal already appears in the works. Speculation is rampant that numerous bidders are vying for Guaranty, an Austin thrift, which just last month said its failure was "probable."

Possible bidders include several banking companies, like U.S. Bancorp, and private-equity giants Blackstone Group LP, J.C. Flowers & Co. LLC and investor Gerald Ford. Some sources said bidding was delayed this week because of concerns about the FDIC's proposal.

John Bovenzi, the agency's former chief operating officer, said that while clear guidelines are needed, the FDIC will do what it must to protect the Deposit Insurance Fund.

"I think the FDIC's preference would be to have a final policy and clear rules that apply to all," said Bovenzi, now a partner at Oliver Wyman Group, a subsidiary of Marsh & McLennan Cos. "If a situation warrants an exception to a policy they would look at that on a case-by-case basis depending on the situation."

Private-equity investors have opposed the plan since its inception. They have harshly criticized a proposed requirement to maintain a 15% Tier 1 leverage ratio — much higher than for traditional bank owners — as well as requirements that they cover losses at other institutions they own and hold on to banks for a minimum of three years before selling them.

In comment letters, critics said the agency should not impose on private-equity buyers stricter qualifications than those that apply to other bank owners. They also said the proposal does not sufficiently reduce uncertainty about who the agency would, and would not, let own banks.

Many said the new requirements were not needed, since existing law already establishes limits on who can own banks.

"The Deposit Insurance Fund and the industry would be best served by uniform application of this existing law and policy to all potential acquirers, including private-equity firms and other nonbank bidders, rather than through special, discriminatory rules applicable to only a particular group of potential acquirers whose capital is urgently needed in this industry," the law firm Jones Day wrote on behalf of its private-equity clients.

Some also wanted better clarification on how big a stake an investor must have in an institution to trigger the proposed restrictions. Critics said the agency had not clearly defined which types of "silo structures" — which can conceal the investors who are most involved in a bank's control — the proposal would restrict.

"To our knowledge there is no agreed-upon definition of the term, and there is a danger that it could cover legitimate transactions in which the undesirable features are not present," wrote J. Christopher Flowers, the head of J.C. Flowers, in an Aug. 10 letter.

There are also questions about how the plan could affect deals already cut with private-equity investors, including those to resolve $30 billion-asset IndyMac Bank in Pasadena, Calif., and the $13 billion-asset BankUnited in Coral Gables, Fla.

But the guidelines appear much tougher than any terms laid out in those deals. There was no requirement, for example, that investors not sell IndyMac or BankUnited for three years or maintain a 15% minimum capital ratio.

John Kanas, the chief executive at the new BankUnited, said he opposed allowing the policy to apply retroactively.

"Our business plan, which was reviewed and approved by the FDIC, expressly contemplates growth through the acquisition of troubled or failed banks," Kanas wrote in an Aug. 5 letter. "Indeed, we raised substantial excess capital for that purpose. The new requirements of the proposed policy statement could prevent us from efficiently deploying that capital."

The agency has indicated a willingness to be flexible. Many expect the final guidelines to be lighter than the proposal, with the capital ratio minimum dropping to as low as 8% or 10%.

In the meantime, an agency spokesman said the FDIC has not "said that there would be any sort of period where we wouldn't potentially engage in these types of transactions if it proved to be the least costly to the Deposit Insurance Fund while the comment period was in process and we worked on a final rule."