Private-equity firms have been adding ex-bankers to their lineups the way New York sports teams stock up on free agents.
But can these hirings help their new companies win over inherently skeptical regulators in their quest to buy banks?
The answer will not be in until federal agencies complete rules regarding such takeovers and act on additional applications. Observers predict that, though the hires will make regulators more comfortable, their presence will not be enough to erase regulators' fears about the risks private-equity buyouts present to the traditional banking system.
John A. Kanas, a former chief executive of North Fork Bancorp who is leading a group of private firms that are buying BankUnited Financial Corp. in Florida, knows that hires like him are being scrutinized closely.
"The regulators are trying to be cautious about whose hands these types of institutions fall into," said Kanas, who retired from banking in 2007 before joining W.L. Ross & Co. "So private-equity managers are being very selective and careful" about who they hire.
For bankers looking to follow in his footsteps, Kanas advised: "This isn't a hobby."
Several notables have joined the ranks of private equity this year, including the former Wachovia Corp. CEO G. Kennedy Thompson and a former Citigroup Inc. chief financial officer, Gary Crittenden. The two became advisers to firms that are scouting financial services investments.
Employing bankers should make regulators more comfortable with certain private-equity firms, said Kevin Jacques, a former official at both the Treasury Department and the Office of the Comptroller of the Currency, who is now chairman of the finance department at Baldwin-Wallace College.
"When regulators look at Camel ratings, the 'M' is a critical factor," he said, referring to the importance of management. "There is a benefit to having bankers on board who understand the practice of balancing risk management with capital and liquidity."
There are others who say that many issues with private equity persist even after banking expertise is added, including questions about conflicts of interest that can occur within a portfolio and concerns over leverage and long-term investment strategy.
William Black, a professor at the University of Missouri at Kansas City and a former senior deputy chief counsel at the Office of Thrift Supervision, said regulators should be "only slightly more comfortable" with private-equity firms that have bankers as advisers. "The primary concern regulators have with private equity is conflicts of interest, not a lack of banking knowledge," he said.
The Federal Deposit Insurance Corp. has been working on a road map that would let private-equity firms bail out failed banks and thrifts. The hurdles for ownership are expected to be more onerous than those for traditional bank mergers. The agency, for instance, is considering requiring private capital investors to have higher capital reserves than traditional banks, to backstop losses with other investments and to hold on to acquired banks for three years.
Still, there is agreement that private firms have made great strides by recognizing the need for operational experience when it comes to investing in, or buying into, a highly regulated industry such as banking.
Some ex-bankers have been approached by multiple suitors. A key carrot has been a willingness to give former bankers significant say on investment decisions, backed by plenty of capital to make things happen.
Such latitude enticed Thompson, ousted last summer at Wachovia, to resurrect his career at Aquiline Capital Partners, where he is an executive adviser. Thompson is evaluating investments ranging from banks and asset managers to financial technology firms and insurance companies.
"I am trying to put some of the skills I developed over my banking career back to use," Thompson said. "Private equity is an area that makes that possible."
One problem for the FDIC is that not all private-equity firms have been aggressively luring seasoned bankers.
Richard Spillenkothen, a former Federal Reserve Board supervision director who leads Deloitte & Touche LLP's bank regulatory consulting practice, said the FDIC is challenged to create a broad set of parameters for all private-equity firms, regardless of any degree of in-house expertise.
"They must strike a balance between being broad enough for the industry, but specific enough to provide protections for investors," he said, which could mean that even the best-staffed firms could face many of the same hurdles as those who have not made strategic hires.
Observers said regulators may also look closely at bankers who left their companies under a cloud. Analysts have wondered whether Thompson will find it hard to shake Wachovia's ill-fated Golden West Financial Corp. purchase. Fortress Investment Group LLC adviser R. Eugene Taylor's 2007 retirement from Bank of America Corp.'s investment bank came after a disappointing quarter and coincided with a restructuring of the business. Thompson said he would not comment on Golden West; Taylor did not immediately respond to an e-mail seeking comment.
Taylor, however, is expected to become the CEO of First Southern Bancorp in Boca Raton, Fla., as part of a buyout involving Fortress and two other private firms.
"The difficult part for regulators is trying to ascertain whether the problems were because of the person, the organization or the environment," Jacques said. "Overall, the idea of having former bankers in this PE group can be very beneficial."