Monday, May 18, 2009

Treasury Allows Private Equity to Buy Distressed Thrifts

The Fed allows private equity firms to band together to buy failed banks, as long an no firm has over 24.9% interest. The Office of Thrift Supervision (OTS) seems willing to allow private equity underwriters (PEU's) to hold a majority interest in financial firms, savings & loans, thrifts and credit unions. The OTS is part of the Treasury Department. Bloomberg reported:

H. Rodgin Cohen, chairman of Sullivan & Cromwell, the New York law firm that represented MatlinPatterson on the Flagstar deal, as well as other private-equity firms, defended the concept at a forum sponsored by Bloomberg on May 4.

“I see no reason why private equity should not be able to invest fully in banking institutions, take control of stakes,” Cohen said. “There are structures which will accomplish this, and you could put in real barriers to preserve the safeness and soundness of the institution and to prevent conflicts of interest.”

Mr. Cohen was recently Tim Geithner's nominee for Deputy Treasury Secretary. He withdrew his name. Tim's mentor at the New York Fed was the Blackstone Group's Pete Peterson.

Blackstone Group LP and Carlyle Group, the world’s two biggest LBO firms, are among those eager to snap up banks on the cheap after global losses tied to the credit crisis topped $1.4 trillion and slashed the valuations of lenders.
Tim Geithner and Larry Summers recently rubbed elbows with Carlyle co-founder David Rubenstein at the Economic Club of Washington. Olivier Sarkozy, Carlyle's co-head of financial-services investments said:

“While there are valid public-interest issues that would need to be discussed and addressed to everyone’s satisfaction, not being able to control a bank we invest in increases our risk and therefore results in our demanding a higher return,” Sarkozy said. “That in turn increases the ultimate costs to the taxpayer of the industry’s necessary recapitalization.”

Carlyle bid on BankUnited. They may soon have a captive bank. How does that impact customer service, while Carlyle pursues Super Returns? News reports show Carlyle hoping to zero out BankUnited equity holders and wanting billions in financing from Uncle Sam. Those super returns could come on shareholders' and taxpayers' backs. Shadow bankers imploded Wall Street. They'll soon be majority owners of thrifts. Disaster capitalism thrives.