Starved for Capital, Lenders Call on Banks

One needs look no further than the billions in writedowns and losses due to structured finance holdings at major Wall Street banks such as Merrill Lynch(MER Quote) and Citigroup(C Quote) to see the damage done, as investor appetite for these securities disappeared in the credit crunch.

"All of these exotic securities that have been created in the last few years have been misunderstood, poorly underwritten, and people have lost significant amounts of money on them," says Richard Bove, an analyst with Ladenburg Thalmann & Co. "There has been a clear move away from them in the marketplace, because people simply don't trust them."

Early concerns over such a shift in investor sentiment and the effect it would have on the capital markets were what drove CapitalSource to begin a quest to buy a bank three years ago, according to CEO John Delaney. Last month, CapitalSource completed its acquisition of Fremont General, a Brea, Calif.-based bank that last year consented to a cease-and-desist order from the FDIC that forced it out of residential subprime lending.

Owning a bank gives CapitalSource access to $5.2 billion in deposits to put to work in extending new loans. Delaney believes that new regulations and stricter capital requirements by ratings agencies will take away many of the advantages enjoyed by the capital markets. The agencies greased the wheels of the securitization machine by bestowing high ratings on structured debt products that posed a serious risk of default. Now the banks, with their more secure deposit bases, are poised to return to the driver's seat once they get past their current difficulties, Delaney and others believe.