Bank-Takeover Plan Said to Require Capital From Buyout Firms

By Jonathan Keehner and Jason Kelly

July 1 (Bloomberg) -- The Federal Deposit Insurance Corp.’s new rules for bank takeovers by private-equity firms would force buyers to pledge more capital should lenders falter, people briefed on the matter said.

The rules are still being debated within the FDIC, the agency that oversaw the sale of BankUnited Financial Corp. to firms including Blackstone Group LP and Carlyle Group in May, the people said, speaking anonymously because the talks in Washington are private. The FDIC, which plans to announce the guidelines tomorrow, is courting private-equity firms amid calls from some politicians to monitor their stewardship of banks.

“It’s a tough place for the FDIC to be,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “They would love to get the extra capital in, but there are fears. They’re worried that private capital can exacerbate the risks.”

Buyout firms, grouped together as clubs of minority investors, pumped more than $1 billion into U.S. banks in May after financial companies worldwide racked up almost $1.5 trillion of writedowns and credit losses in the past two years. The FDIC has closed 45 U.S. banks so far this year.

The rules would outline capital levels the banks must maintain, how long buyout firms must hold investments and requirements to recapitalize lenders under the so-called source of strength doctrine, the people briefed on the matter said. They would go into effect immediately, and could be altered under a review period that begins at the same time.

Two-Year Minimum

Most worrisome to private-equity firms may be expanding the source of strength doctrine, which requires a bank’s owner to support an ailing lender, to minority investors such as private- equity firms in a club. The FDIC is considering expanding so- called modified obligations to buyout firms acting as a club, the people said. Each firm’s commitment could be limited on a proportional basis to their stake, they said.

Another option to ensure adequate capitalization would be an agreement that the buyout firms wouldn’t stand in the way of new third-party capital for the banks, the people said.

The guidelines are likely to set two years as the minimum period for private equity firms to own banks before selling them, and to set a level for the capital ratios they must maintain. The rules may also create so-called cross guarantees between banks with common owners and clarify existing rules behind transparency, including how much private-equity firms must disclose about their other investments, as well as their own investors.

Lightyear, Colony

Blackstone and Carlyle, the two largest private-equity firms by assets, and smaller groups including Lightyear Capital LLC and Colony Capital LLC are analyzing investments in dozens of healthy and ailing banks. Buyout managers have an estimated $400 billion in committed yet unspent capital. Announced private-equity deals dropped more than 60 percent last year to $211 billion, according to data compiled by Bloomberg.

Private-equity firms formed groups to buy BankUnited, Florida’s largest lender, as well as IndyMac Bancorp, both of which were seized. Firms including Lightyear and Fortress Investment Group LLC also collaborated on an investment in another Florida lender, First Southern Bancorp, in May.

Senator Jack Reed, the Rhode Island Democrat who chairs a subcommittee overseeing the securities industry, has been wary of welcoming that capital into the banking system.

‘Get This Right’

“Senator Reed and other watchdogs have effectively pressured the regulators by saying private equity is welcome but needs proper safeguards,” said Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut School of Law in Hartford. “For a regulator, the danger of not proposing sufficient guidelines is that Congress creates a law that’s less flexible and out of their control.”

Reed wrote a letter in May to regulators including FDIC Chairman Sheila Bair asking them to set forth their rules around private-equity investments in banks.

In a June 5 response, a copy of which was obtained by Bloomberg, Bair pointed to the BankUnited and IndyMac deals and “significant conditions to these two private equity transactions, including capital maintenance and resale restrictions.”

The BankUnited agreement included a provision that prevents a sale of a controlling interest in the bank for 18 months.

Bair reiterated the agency’s intent to issue “generally applicable policy guidance” on private-equity investments. In a handwritten postscript next to Bair’s signature was written, “Good chatting with you. We will get this right.”

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net