What Banks Need Now
July 21, 2008
Whether it’s covered bonds, short-selling restrictions or propping up Fannie and Freddie, the federal government has been playing an active role in trying to stabilize the financial markets. Some would argue they’re not doing enough, while others want to put the brakes on this type of intervention, fearful that these actions will lead to unwarranted and inefficient regulation.
But whatever your view on Bernanke and Paulson, one development that should be cheered is the government’s support for rule changes that would facilitate more private equity investments in banks at a time when the banking industry sorely needs capital.
Currently, one of the big hurdles for private equity firms is the federal law that requires investors to register as a bank holding company if their stake is larger than 24.9 percent. And even a stake that’s higher than 9.9% comes with some added scrutiny, such as being required to list your fund’s limited partners. That helps to explain why deals like TPG’s investment in Washington Mutual earlier this year have been few and far between.
I’ve heard a few pundits express concern that if private equity firms invest in banks at a time when their stock prices are low, they’ll get too sweet of a deal and, what’s worse, their investments might indirectly be afforded a level of government support that a private investor shouldn’t have rights to.
Give me a break.
Considering the precarious position that many U.S. banks are in, this is no time to be worrying about the private equity market getting too sweet of a deal. Fact is, in a market like this, cash is king, and the investors who have cash are of course in an enviable position. History tells us that some of the best investments are made in bad markets. So, if cash-rich PE firms are poised to pounce on troubled companies in hopes of making a fat return, why shouldn’t they have more incentive to put that money to use in a sector that needs the capital? If everything stays the same, it’s inevitable that they’ll put that money to work elsewhere.
This is not only a win-win situation, it’s a must-win situation for the U.S. banking industry. Let’s stop trying to find a loser.
-- Adam Reinebach, Publisher
adam.reinebach@sourcemedia.com
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