FDIC Nixed Private Equity Bid for Banks

Private equity firms generally are not able to acquire controlling stakes in banks because they do not want to register with regulators as bank holding companies. Belvedere is one of a small handful of firms that have done so. Others are Castle Creek Capital in Rancho Santa Fe, Calif. and New York-based CapGen Financial run by Gene Ludwig, a former U.S. Comptroller of the Currency.

There have been recent instances of private equity firms taking minority stakes in banks, however. These include The Carlyle Group's $75 million investment in Boston Private Financial Holdings(BPFH Quote), a $7 billion investment in Washington Mutual(WM Quote) led by TPG and another $7 billion capital infusion in National City(NCC Quote) led by Corsair Capital earlier this year.

But if private equity firms looking at investing in the banking sector are hoping the government will protect them against their losses, they will need to shift their strategy.

Many banking industry M&A experts say the government is not likely to provide backstops to private equity firms looking to assume troubled bank loan portfolios. "There's no one who will ever get a backstop from the government in an open bank private equity investment," says Thomas Vartanian, partner at law firm Fried Frank.

There have been instances in which the FDIC has signed "loss-sharing" agreements with bidders on bank loan portfolios, though these were much more common in the late 1980s and early 1990s, according to Barr, the FDIC spokesman.

Asked why the FDIC didn't hold onto the deposits in order to give itself time to analyze the loans and use them as a carrot to a buyer in a later auction, Barr says the 4.4% premium on deposits paid by Mutual of Omaha is "one of the highest you're going to see," a view echoed by Nautilus Capital's Minor. Barr says that the FDIC prefers to protect the deposits and get depositors into a new banking relationship.

"While we have run banks, we generally don't do it as a matter of course," he says.