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Bank Buyout Boom Stalls Before It Starts

The rush of private equity dollars into the banking sector anticipated by some seems to have been stalled by the FDIC guidelines unveiled in August.



) -- In January, when the Federal Deposit Insurance Corp. announced it had sold

IndyMac Bancorp

to a group of buyout firms, it looked like it could be the start of something big.

"The government has all the downside and we have all the upside," said

J. Christopher Flowers

, one of the investors in the deal, at an industry conference a few days later.

In May, some of the biggest names in private equity, including

The Blackstone Group

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The Carlyle Group


W.L. Ross & Co.

, got into the act, teaming up on a similar bid for


in Florida, which is to be run by former North Fork boss

John Kanas


Now, however, things appear considerably more difficult for the buyout firms. A private equity-led deal to buy another failed Florida bank,

First Southern Bancorp

, now appears dead in the face of regulatory resistance, according to a report in

. The buyout shops involved in the planned deal, including

Fortress Investment Group



Crestview Partners


Lightyear Capital

, all either declined comment or did not return calls.

Blackstone, whose president and COO Hamilton Tony James, had told reporters in May that "we like that play a lot," referring to buying failed banks from the FDIC, now appears to be rethinking things.

"Still looking at this issue internally. Not really ready to talk right now," wrote spokesman Peter Rose via email, in response to an interview request.

One big reason for the diminished interest is new rules from the FDIC, announced in August. The rules subject private buyers of banks to strict capital requirements and lengthy holding periods.

"Private equity is really far down the list in terms of who the FDIC wants to sell to," says Tom Chen, head of the investment banking unit at Piper Jaffray that advises on deals in the financial industry. Chen says the rules "threw cold water" on deal activity.

FDIC spokesman David Barr declined comment on these assertions, though regarding a requirement that buyout firms stay invested in banks they acquire for a minimum of three years, he said. "We're looking for that long-term commitment. We don't want to see people coming in and flipping."

There are even concerns the rules could apply retroactively to BankUnited and Indymac, according to one dealmaker, Another executive said he thought private equity-owned banks might be prohibited from buying other banks for three years or so.

BankUnited CEO John Kanas shot down both assertions.

"Clearly the new rules make it more expensive for newly-formed private equity groups to engage in bidding on failed banks from federal regulators. We've gotten every indication they don't apply to us," Kanas told

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Kanas also believes regulators continue to welcome bids for failed banks from private equity.

"It seems clear that what the regulators are facing is an increasing number of bank failures next year, and they seem to be doing everything they can to encourage as many bidders as possible, including private equity," he says.

The Carlyle Group seems to agree. "We believe there will continue to be opportunities to buy banks from the FDIC and there are plenty of chances to invest in the financial sector more broadly in this time of distress," said spokesman Chris Ullman.

Some dealmakers fault Flowers, for the outspoken comments mentioned earlier, and another much-cited wish he made in another public appearance that "lowlife grave dancers like me will make a fortune," from the crisis. Flowers declined to comment.

A separate issue is how one defines private equity. Walt Mix, a former California bank regulator who is now managing director at


, a consulting firm, says he is advising several "investor groups" on buying failed banks, many of which he does not classify as private equity. While he says the Obama administration is making it tougher to buy failed banks than George H.W. Bush did during the S&L crisis of the 1980's, he still expects to see several more deals consummated. Many of the investors he advises will end up owning less than 10% of the banks they buy.

There is talk that that threshold may become the norm for buyout firms as well. Though they are currently allowed to own up to 24.9% of an institution, a couple of private equity executives say the Federal Reserve may lower that number to 9.9%.

Perhaps with that in mind,

FBR Capital Markets


has put together a $1.15 billion "blind-pool," for investing in troubled banks, according to

. No investor is allowed to own more than 9.9% of this fund, the report states. Other such funds are said to be in the works at least one of which is advised by

Goldman Sachs

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Another solution is to buy healthier banks, where regulators are said to be more easygoing. One recent example of such a deal was when a group of private equity firms bought First Republic Bank from

Bank of America

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last month.

Other private equity firms may provide capital to regional or mega-regional banks, allowing them to make acquisitions more palatable to regulators. A $115 million investment by

Warburg Pincus


Webster Financial


last month is said to provide a template for future deals of this type.

One executive at a large buyout fund says he welcomes the tougher regulations, because all they do is make it more expensive to buy a bank, which will reduce the number of bidders. He says he was never going to be able to compete with

JPMorgan Chase

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U.S. Bancorp

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, but that now, at least, he is spared from having to bid against "every Tom Dick and Harry" who wants into the banking sector.

In short, there will be more private equity deals in the bank sector. But the wholesale takeover of the industry initially feared by some clearly is not happening.


Written by Dan Freed in New York