IndyMac's Failure: A Year Later

Both deals included respected private equity titans, some of whom have close ties to regulators, including Flowers, Wilbur Ross and Blackstone (BX). Both deals also included provisions to help struggling homeowners and put banking veterans in charge of operations, in the belief that they are well-equipped to shepherd the firms back to health.

In contrast, the FDIC opted to shut down Silverton Bank rather than hand it over to a group that included The Carlyle Group and three other private-equity investors. The implicit message in that move was made clear last Friday, when the FDIC unveiled a set of strict guidelines for private investors that hope to successfully acquire a bank.

The proposed rules included a 15% Tier 1 leverage ratio that is unlikely to pass muster on the private equity side. ("It's insane," says one insider who balked at the plan.)

After all, the private equity formula for making heady rewards is to get in cheap, turn around distressed assets quickly, then sell them off at recovery-level prices. Those firms have a ton of cash, but don't want to tie up large portions of it in reserves.

Lee Meyerson, who has advised on both the IndyMac and BankUnited deal at the law firm Simpson Thacher, says several key elements, from capital commitment to secrecy law jurisdictions to ownership rules will "likely have a dampening effect on private capital investor interest."

FDIC Chairwoman Sheila Bair acknowledged in a blunt statement that 15% was "opening high," and that the capital requirement would be a "contentious area." She added that she has an "open mind" for negotiating, but there was little wiggle room when it came to broader goals of the framework -- to keep banks well-capitalized, well-managed and stable.

"We don't want to see these institutions coming back," Bair said in a statement.

The window of opportunity for private equity in the banking sector may be fast closing. And firms like IMB HoldCo, which closed one attractive deal, may see broader plans to build a regional network through several acquisitions stymied.

That's especially true as the improved securitization market has been further bolstered by the launch of the Public-Private Investment Program. That gives troubled banks and the FDIC another option to get rid of bad assets once the markets have fully recovered.

Furthermore, healthier banks have started to gain interest in acquiring smaller rivals again. For instance, Goldman Sachs (GS) and Toronto Dominion (TD) were reportedly the competing bidders for BankUnited, and smaller banks with a lower profile, like First Niagara, have been vocal about expansion plans.

Until then, it seems private equity and the FDIC are strange bedfellows destined to get cozy with one another by reaching a middle ground.

"Right now what's left is private equity," says Joseph Lynyak, a partner at Venable LLP, who has advised private equity firms on bank deals. "If someone can come up with a better mouse trap, that's a great thing. But a lot of us don't see it at the moment."

Despite mistakes that are evident with flawless hindsight vision, some say regulators did a decent job, given the fact that the FDIC hadn't handled a bank failure of that scale in well over a decade. And, depending on how successful loan-modification efforts are, the FDIC may not lose money on IndyMac at all.

"They had to get back up to speed for handling institutions that large," says Lynyak. "They did the best they could in a terribly complicated situation, and have actually done much, much better in the subsequent failures. They learned something from IndyMac."

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