Private Equity Firms Exploiting Financial Crisis and Buying Up Failed Banks Cheap

As More Banks Fail, Private Investors Gain Favor

August 25, 2009

The Associated Press - With the toll of bank failures surging, regulators are expected Wednesday to ease rules they proposed only last month for private investors seeking to buy failed institutions.

Private equity funds have been targets of criticism in recent years for their risk-taking and outsized pay for managers. But the depth of the banking crisis appears to have softened the Federal Deposit Insurance Corp.'s resistance. In part, that's because fewer banks are now willing to buy other, ailing institutions.

In July, when bondholders rescued commercial lender CIT Group Inc., it marked the first time since the crisis erupted last fall that private investors had saved a big financial firm without federal aid or oversight.

Rising loan defaults, fed by tumbling home prices and worsening unemployment, have hammered banks. Eighty-one have failed so far this year. The closings have drained billions from the FDIC deposit insurance fund, which insures regular bank accounts up to $250,000 and is financed with fees paid by U.S. banks.

The FDIC estimates bank failures will cost the fund around $70 billion through 2013. The fund stood at $13 billion — its lowest level since 1993 — at the end of March. It's slipped to 0.27 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.

The FDIC seizes failed banks and seeks buyers for their branches, deposits and soured loans. Under the crush of failures, the agency says private equity can inject vitally needed capital into the system, especially with fewer healthy banks looking to acquire failed institutions.

"There's an enormous need for private money to do this," said Josh Lerner, a professor of finance at Harvard Business School. "There's the sense that you have a lot of money which is currently sitting on the sidelines."

A potential "sweet spot" for private equity buyers are banks with $5 billion to $20 billion in assets, said Chip MacDonald, an attorney at Jones Day in Atlanta. Falling within that range was BankUnited FSB, a Florida thrift with $12.8 billion in assets that closed in May. BankUnited was sold for $900 million to a group of private equity investors that included billionaire Wilbur Ross ' firm, without the new FDIC policy being in effect.

Private equity firms tend to buy distressed companies, slash costs and then resell them a few years later. They invest their own capital to buy a company and pump it up with money from other investors.

Such "leveraging" to buy companies amounts to, on average, three-to-one for private equity firms: They invest $3 in outside capital for each $1 they put up themselves. The roughly 2,000 private equity firms in the U.S. have around $450 billion in capital to invest, according to the Private Equity Council, the industry's 2-year-old advocacy group.

Investors in private equity funds include pension funds, university endowments and charitable foundations.

Organized labor still denounces private equity as vultures and job-killers. Unions got a sympathetic ear from many Democrats in Congress in 2007, when several key lawmakers pushed to raise taxes for managers of private equity firms as well as hedge funds. That tax campaign stalled.

The private equity industry is exploiting the economic crisis to enrich itself, said Stephen Lerner, director of the private equity project at the Service Employees International Union.

"They are trying to use their political and financial sway to get into what they see as bargain basement prices for very little risk."

But with the financial crisis and recession causing banks to fail at the fastest pace since the height of the savings-and-loan crisis in 1992, support is building among regulators to use private equity money to bolster the industry.

"We want nontraditional investors," FDIC Chairman Sheila Bair said in early July, when the agency proposed its rules. "There is a significant need for capital, and there is capital out there."

When the FDIC board meets in a public session Wednesday, it's expected to ease restrictions, people familiar with the issue say. They spoke on condition of anonymity because the rules haven't been made public in final form yet.

Regulators also have begun to reach overseas.

On Friday, the FDIC seized Guaranty Bank, a big Texas lender, and sold most of its operations to the U.S. division of Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank. Guaranty was the second-biggest U.S. bank to fail this year, with about $13 billion in assets. Its sale marked the first time during the crisis that a foreign bank had bought a failed U.S. institution.

In the FDIC policy as proposed, the most important requirement is for private equity investors to maintain enough cash in the banks they acquire, as measured by its capital leverage ratio. The ratio is a measure of health, reflecting a bank's capital divided by its assets.

Investors would have to maintain a ratio of at least 15 percent for three years. Most banks have ratios lower than that. Citigroup Inc., for example, had a reported ratio of around 9 percent as of June 30. The mandate could be reduced to 10 percent or lower in the final rules, the people familiar with the issue say.

A private equity role in the FDIC's resolution of failed banks would be in addition to private investors' participation in a Treasury program to buy banks' bad mortgage-backed assets. That program is intended to relieve banks of up to $40 billion of these assets, whose value plummeted with real estate prices.

But some analysts question whether this program will provide much benefit. Rising unemployment and loan defaults appear to have surpassed soured bank securities as threats to the financial sector.

Some of the Bank Bailout Funds Went Into Private Bank Accounts

August 28, 2009

Watson's Web - Now let me tell you something you do not know and not even the 'forward leaning' Alex Jones is going to tell you. Some of this bailout money (loans to banks) went directly into private banking accounts and never got to where Congress intended for it to go. Let me say it again: some of this money went into PRIVATE accounts. That is why Bernanke was given another term at the Fed. He will continue to cover it all up. It is not that Obama wanted to re-appoint him - the recipeints of all of that loot (to their personal accounts) are still getting lots of money and wanted him to stay...

The criminal corruption of the past eight years will not only continue, but accelerate under Obama. He may want to do the right thing but it is politically impossible.

No one on the net really understands just what is going on - there are a couple of voices out truly in the wilderness (you probably never heard of them) and in wacky news groups who know what is happening. And no I am NOT talking about the vast majority of your prophecy sites - these can be of use if the men and women are really hearing from the LORD, but most aren't - they are big phonies who are looking for a following.

It may surprise some of you to know that some real government 'heavy hitters' go out there into the far reaches of the internet from time to time and pose as 'Nostradamus' or 'Thor, bringer of light' or the 'Third Incarnation of St. Beranadette' and drop tidbits of info for anyone who is brave enough or open minded enough to listen. Oh yes, they do.

But for the most part, the Blogosphere is becoming a tamed lion - lots of unused potential by sites who have put growth over truth. They merely extrapolate their own conjectures from an AP or Reuters wire story and refuse to do a little digging on their own. Fortunately, there are some people in the government with some integrity who will share information with those who will listen. Most of these big time sites are not really interested in the truth, just traffic.

I am different here. I am here to get as much truth out as I can to any who will listen - God's people first and the rest who will listen. I do not care about growth and could care less about revenue. Money is a most dangerous slavemaster. I would rather be poor and serve God than be rich and have a million hits a day. I serve another God - Christ Jesus is his name - and will do this job as long as I am able and he commands.

I have been able to get a decent following of serious Christians and powerful people here for a reason.

The truth is the most valuable commodity in Washington and in America; and even insiders and even a few policy wonks have come to trust the analysis on this site.

Joe sixpac? If he can't drink it, smoke it or have sex with it, he just isn't interested.

FDIC Revises Rules to Favor Takeover of Banks By Private Equity Firms

August 27, 2009

Reuters - U.S. banking regulators partially retreated from a much-criticized proposal to impose new rules on private equity investment in troubled banks, aiming to encourage investments in distressed bank assets.

The 4-1 vote by the Federal Deposit Insurance Corp board was a partial victory for some regulators and potential investors who had warned that an initial proposal unveiled in July threatened to scare away much-needed capital.

FDIC Chairman Sheila Bair said the modified rules could still depress investor interest in failed banks but the guidelines needed to be strict enough to weed out irresponsible investors. "The FDIC recognizes the need for additional capital in the banking system," she said, but added: "We do want people very serious about running banks."

A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 percent, from the 15 percent Tier 1 leverage ratio previously proposed.

The regulators also dropped a requirement that investors serve as a "source of strength" for the bank they buy, which critics said could have put them on the hook for more capital if the institution struggled.

A cross-guarantee proposal -- meaning if an investor owns more than one bank, the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered -- was modified to only include investors that had an 80 percent common ownership of the two banks.
The rules will be further reviewed in six months.

U.S. bank regulators are increasingly looking to nontraditional investors -- such as private equity groups and international banks -- to nurse failed banks back to health as the number of insolvent institutions continues to rise, draining the FDIC's deposit insurance fund.

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.

"On the whole, it's favorable to private equity. It's positive in terms of attracting private equity money," said Brett Barragate, a partner with the Jones Day law firm.

The dissenting vote was from acting director of the Office of Thrift Supervision, John Bowman, who said the revised policy was overly broad and imprecise. He also expressed unease at singling out private equity investors as a separate group.

Voting for the rules were Bair, FDIC Vice Chairman Martin Gruenberg, FDIC Director Thomas Curry and Comptroller of the Currency John Dugan. Dugan had raised concerns in July about the initial version of the rules, but said he supported the new guidelines, describing them as "significantly improved."

The FDIC on Wednesday also voted to extend by six months a program that guarantees transaction deposit accounts, which businesses typically use to meet payroll and pay vendors. "It has improved overall liquidity throughout the banking system," Bair said.

The agency also said it would seek comment about whether to phase in the impact on banks' capital requirements of an accounting change that requires institutions to bring off-balance sheet assets back on their books.

U.S. Regulators See Vote Later Today on Bank Investments

August 26, 2009

Reuters - U.S. regulators are still finalizing guidelines for private equity investments in distressed banks but expect to have a final vote on the issue later on Wednesday, the acting director of the Office of Thrift Supervision said.

"We're still in the process of discussions on what that document will look like," John Bowman told reporters during a briefing on the earnings of the thrift industry.

The Federal Deposit Insurance Corp, which includes Bowman among its board members, is expected to soften the private equity guidelines first proposed in July, in an attempt to attract more investors to the assets of distressed banks.

FDIC to Loosen Rules for Private-Equity Firms to Take Over Banks

August 25, 2009

Bloomberg - The Federal Deposit Insurance Corp. is poised to make it easier for private-equity firms to buy banks after the fastest pace of bank closings in 17 years cost the agency’s insurance fund more than $21 billion.

The FDIC board meets tomorrow in Washington and probably will lower the requirements for private investors to buy failed lenders after a proposal made in July sparked opposition from the industry. The agency needs new bidders as bankers avoid buying failed lenders, forcing the FDIC to share losses or take other steps that deplete its insurance fund.

“There are a lot of private-equity bidders that have been waiting to see how this rule plays out,” Mark Tenhundfeld, senior vice president at the American Bankers Association, said yesterday in a telephone interview. “As modified, I think private equity is likelier to want to get back in the game.”

Banks are collapsing at the fastest pace since 1992, with 81 failures so far this year, as losses mount on unpaid real- estate debt. The failures have cost the FDIC’s deposit insurance fund an estimated $21.5 billion this year. The agency may impose an emergency fee in the third quarter -- sooner than planned -- to replenish the fund, the second such assessment this year.

The modifications may lower to 10 percent from 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank, Tenhundfeld said. Tier 1 ratios measure a lender’s ability to withstand losses and new banks must maintain at least 8 percent to be deemed well capitalized.

“It is a proposed rule,” FDIC spokesman Andrew Gray said in a telephone interview. “The purpose of the comment period is to get feedback from all stakeholders and refine the proposal based on that.”

The FDIC has twice brokered deals with investor groups this year. In March, California-based IndyMac Federal Bank was sold to investors led by Steven Mnuchin, an ex-Goldman Sachs Group Inc. investment banker, and including buyout firm J.C. Flowers & Company. Florida’s BankUnited Financial Corp. was sold in May to firms including Blackstone Group and WL Ross & Co.

Senator Jack Reed, a Rhode Island Democrat who leads a subcommittee overseeing the securities industry, wrote in May to FDIC Chairman Sheila Bair and Federal Reserve Chairman Ben S. Bernanke asking them to spell out rules for investments in banks so private investors can’t take advantage of U.S. assistance.

The FDIC is a state-bank regulator that insures consumer deposits at lenders, finds buyers for institutions on the verge of collapse and unwinds them after they fail. The agency in July gave the industry 30 days to comment on the guidelines and tomorrow plans to release modified rules based on the feedback.

The capital requirement as proposed “is onerous” and would eliminate interest from private-equity investors, Douglas Lowenstein, president of the Private Equity Council, a Washington-based industry group, wrote in an Aug. 6 comment letter to the FDIC.

The FDIC also may drop the cross-guarantee provision, which would require a private-equity firm with investments in more than one failed bank to provide guarantees for losses based on its level of investment in each of the institutions, said Joseph Lynyak, a partner specializing in banking at Venable LLP in Washington.

“It’s an open-ended loss guarantee that I don’t think anybody is willing to accept,” Lynyak said of the proposal.

Even with the changes, private-equity firms may be reluctant to participate out of concern the government could modify the rules later, Lynyak said.

From Wikipedia:

According to an updated 2009 ranking created by industry magazine Private Equity International (published by PEI Media called the PEI 300), the largest private equity firm in the world today is TPG, based on the amount of private equity direct-investment capital raised over a five-year window. As ranked by the PEI 300, the 10 largest private equity firms in the world are:

TPG
Goldman Sachs Principal Investment Area
The Carlyle Group
Kohlberg Kravis Roberts
Apollo Global Management
Bain Capital
CVC Capital Partners
The Blackstone Group
Warburg Pincus
Apax Partners

Additionally, Preqin (formerly known as Private Equity Intelligence), an independent data provider, ranks the 25 largest private equity investment managers. Among the larger firms in that ranking were AlpInvest Partners, AXA Private Equity, AIG Investments, Goldman Sachs Private Equity Group, and Pantheon Ventures.

For One Billion You Get...

U.S. hedge fund and private equity managers have been taking their income as capital gains, and paying tax at a 15 percent rate instead of the normal income tax rate of 35 percent. The Democratic Congress has taken up the issue. Why should the $1-billion-a-year earner pay a smaller percentage of tax than a regular worker? - Duncan Cameron July 5, 2007

Editor's Note: The invisible money power behind these secretive private equity firms are the same international bankers that engineered this worldwide banking crisis, with the goal of consolidating the world's wealth into their hands.

U.S. Regulators Prep Defenses to Survive Bank Crisis

August 25, 2009

Reuters - U.S. regulators are set to buttress their defenses this week against a slew of sick banks still facing closure and the risks to the dwindling fund that protects depositors.

The Federal Deposit Insurance Corp has been looking at expanding the pool of potential bidders for distressed banks, providing some capital relief for troubled assets that will soon be brought back onto banks' books, and charging further industry premiums to replenish the insurance fund.

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007. Analysts say the wave of failures is far from over. Richard Bove of Rochdale Securities said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, which started with a dramatic fall in housing prices that sent the economy into a recession and caused many borrowers to default on their loans.

Bove said the continuing failures will force the FDIC to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.

On Wednesday the FDIC will hold a board meeting to vote on guidelines aimed at attracting private investment money to distressed banks while ensuring the investors are serious about nursing these institutions back to health. The agency will likely relax the previously proposed guidelines after critics derided them as overly strict and predicted a chilling effect on investment.

The agency will also vote on a rule that will ask banks if they need some capital relief associated with an accounting change that will bring more than $1 trillion of assets back on their books next year.

On Thursday, the FDIC holds its quarterly briefing that provides critical information about its outlook for bank failures and the state of the deposit insurance fund.

The meetings will come on the heels of two large bank failures that resulted in multibillion-dollar hits to the deposit insurance fund. The largest bank failure of the year landed on August 14, when the FDIC announced that Alabama-based Colonial Bank had been closed and its assets sold to BB&T Corp. Colonial had total assets of $25 billion and is expected to cost the FDIC insurance fund $2.8 billion. This past Friday, the FDIC announced Texas-based Guaranty Bank failed, and that Spain's BBVA was buying its assets. Guaranty, which had $13 billion in assets, drained another $3 billion from the insurance fund.

Paul Miller, an analyst at FBR Capital Markets, said there will be a "drip, drip, drip" of bank failures over the next year but he does not see any more failures of the same magnitude as Colonial. "For the number of bank failures, we're in the first couple of innings. For the size, we're in the late innings," Miller said.

The insurance fund has been drained to its lowest level relative to deposits since 1993, largely because the FDIC must pull out money for expected bank failures over the next year. The fund's balance stood at $13 billion as of March 31, compared to $53 billion a year earlier.

The agency will provide an update on Thursday about how much more money has been drawn, and if the outlook for future bank failures has worsened.

The FDIC in May raised the expected loss for the insurance fund to $70 billion over the next five years from $65 billion.

Officials are likely to reiterate on Thursday that they will have to exercise their option to charge banks further special premiums to bolster the fund. Regulators are still wary of tapping the FDIC's $500 billion line of credit with Treasury. FDIC Chairman Sheila Bair has said she is reluctant to ask taxpayers to temporarily put up money to cover the cost of failures, and would rather have the industry cover the insurance costs.

In May the FDIC voted to impose a 5 basis-point levy on each bank's assets, which equals a $5.6 billion fee that the industry has to pay in the third quarter. The FDIC also voted to give itself the option to collect additional special fees in the fourth quarter of 2009 and first quarter of 2010.