Private equity firms have largely avoided distressed financial companies after getting badly burned last year. But reports this week of a possible joint bid for BankUnited Financial Corp. ( BKUNA) from W.L. Ross & Co. and other investors may indicate a change in sentiment.

John Kanas, the former chairman and CEO of North Fork Bank, is working with Ross and other private equity investors and hedge funds that are looking to buy beaten-up banks. Reached at his office Thursday, Kanas would not confirm or deny the BankUnited report by Bloomberg News.

He spent nearly 40 years at North Fork, becoming president in 1977 when he was just 29 years old. As CEO, he grew it into the third-largest bank in New York, eventually selling it to Capital One ( COF) for $14.6 billion in 2006.

Kanas spoke with TheStreet.com earlier this month.


TheStreet.com: Are you spending most of your time scouting potential investments?

Kanas: I have spent the better part of the last year doing various levels of due diligence on probably somewhere between 50 to 75 companies across the U.S. with no regard to geography.

Are there certain regions that you are most interested in? Certain types of businesses?

By and large banks. We started last year in the Southwest, looking in Arizona and California and those markets have matured more into this cycle. Some of those institutions have assets that have begun to level off, which makes those banks more interesting than they certainly were six months or a year ago. But we're focused more now on the Southeast, with the hub being the Florida market because that market is particularly damaged right now. It has at least a three-year supply of single-family homes and condominiums and it has a banking system that's under a great deal of stress. I suspect that there will be significant opportunities in that market.

Are you interested in catching the bottom and turning around quickly and selling, or are you interested in creating a new company and running it for some time, maybe by yourself or bringing someone else in?

A combination of both, I'd say. The ideal investment opportunity for me would be a distressed property of decent size that could be resuscitated either with or without government help where there's the potential to build a franchise in a market that will eventually recover and start growing again.

Have you in your capacity as advisor and investor actually made any investments?

No. In fact, out of the 75 or 80 situations that I've looked at I have invested in none and W.L. Ross and Co. has invested in none. That's not to say that he hasn't made investments other than in my domain, but of the investments that I've looked at for him in financial services he's made none.

Too early?

Yeah. Too early, and now very complicated because of the presence of the government and the unique position that they've taken in the industry. Too early in my view to make bold investments in banks without government assistance and complicated to make an investment with government assistance.

If you had to bet on whether you end up doing a deal with or without government assistance, which do you think is more likely?

I suspect that our first investment will be with government assistance, though people are very worried about taking on the government as a partner because of the heightened political sensitivities around the industry and because of all the exposure that some of the horror stories have gotten. And to be frank, I suppose we're worried about the risk of the pen: the government might make a contract on one term or under certain conditions and then, for reasons perhaps even beyond their control politically, will re-cut the deal later.

You're on record saying there will be a thousand bank failures. We've only had about 50 so far in the last two years. How are we going to get to 1,000?

I believe that one of the reasons that we haven't had more failures come to the surface is that the regulators are massively overburdened with the deterioration of assets on the books of banks across the country over a relatively short period of time.

Also, remember that this whole mess started not as the result of a recession but as the result of the collapse of the residential real estate market. What's sort of interesting about this whole thing is the least risky assets on bank balance sheets for the last 50 years have been widely recognized as residential mortgages. This situation was triggered by the evaporation of values in residential real estate and has now triggered a major recession in the U.S. that most people would agree has become a worldwide recession. The recession is going to put more pressure on bank balance sheets and the riskier assets that reside on bank balance sheets that usually react badly during recessions have yet to fully deteriorate. Those are commercial loans, commercial development loans, commercial real estate loans and other forms of non residential real estate lending that are generally thought to be more lucrative for banks but more risky. So we're only beginning to enter the phase of seeing how the remainder of bank balance sheets are going to hold up in a deep recession.

You've said in the past that banks should not be allowed to get as large as Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) have become. Why?

I believe it is foolhardy in the most damaging way to knowingly create an institution whose failure could affect our entire economy. I believe the market will take care of that over time. Banks like Citigroup ( C)and others who have gotten too big to manage, too big to regulate and too big to understand will eventually become smaller institutions and that's a more healthy environment for this country.

Do you want to be a CEO again?

I would be a CEO again for the right situation. I don't want to be a CEO for 30 years again but in order to help to launch something in another part of the country I would certainly take on that responsibility with an eye toward grooming a next-tier management group that would replace me in a relatively short period of time.

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