Starved for Capital, Lenders Call on Banks

Lenders who had relied on now-choked debt and equity markets for financing are increasingly looking to good old-fashioned bank deposits as a cheaper and more reliable alternative.

Chevy Chase, Md.-based commercial lender CapitalSource(CSE), which lends to mid-sized businesses such as health care companies by raising debt in the capital markets, last month acquired flagging California bank Fremont General. The deal was done in the belief that dampened investor appetite for these securities will make this way of doing business untenable.

Private-equity investor MatlinPatterson is pursuing a similar strategy with its investment in Thornburg Mortgage(TMA), according to investment bankers, investors and a report in The Wall Street Journal last month.

Scott Albinson, an investment banker at JPMorgan Chase(JPM) who advised CapitalSource on its deal, says he is working with other lenders who were heavily reliant on the capital markets but are seeing new advantages to owning bank deposits.

"Even some companies that have depositories may decide they're not sufficiently optimizing that platform and may look to expand it significantly," Albinson says. Commercial financier CIT Group(CIT) and GMAC, owned by Cerberus Capital and General Motors(GM) are among other big lenders that use bank deposits to supplement the debt and equity they raise in the capital markets.

The new focus on deposits represents a return to its roots by the lending industry, which had increasingly relied on securitization -- a form of financing that involves pooling loans, chopping them up into pieces and distributing them to investors. Securitization is not going away, but it is being called into question in the current environment as having led to irresponsible lending practices.