FDIC Sketches Rules for Bank Deals

Federal bank regulators made clear on Thursday what investors eying financial companies had long suspected: Bring money, experience and a skeleton-free closet.

The Federal Deposit Insurance Corp. on Thursday laid out a set of basic guidelines for private investors that are interested in acquiring dozens of banks that are struggling or have failed.

One of the most stringent safeguards is a proposal for the acquired bank to maintain a Tier 1 leverage ratio of 15% for at least three years after the deal is closed to ensure that the bank is "very well capitalized." FDIC Chairwoman Sheila Bair acknowledged that the proposal would be "contentious," but added that she is "open minded" to negotiations through a comment period which will last about a month.

The FDIC is also seeking to limit opaque interactions between financial institutions owned by the same investor groups, and to ensure that one troubled bank does not bring down all of those owned by one entity. Investors must agree to guarantee all the institutions in which they hold significant interests, and limit transactions between affiliates.

It also proposes limits on "secrecy law jurisdiction vehicles," mostly offshore entities that operate outside the realm of U.S. banking law. The FDIC is also seeking commitments to unspecified disclosures about the takeover target and other entities the investor holds.

A wave of bank failures kicked off last summer, after IndyMac, a large California thrift, collapsed from the weight of bad subprime loans. Since then, 65 more banks and thrifts have failed and more are expected to go under in the coming months.

While Washington Mutual -- the largest thrift to fail in history -- was taken over by JPMorgan Chase ( JPM), private equity groups have shown great interest in the smaller entities and sealed some high-profile deals. A consortium including prominent bank investor J. Christopher Flowers acquired IndyMac. BankUnited, which failed in late-May, was taken over by a consortium headed by banking veteran John Kanas, the former head of North Fork .

Those deals were engineered after careful discussions with the FDIC, with banking veterans whose reputation preceded them to the negotiating table. Bair on Thursday expressed concern about proposals received from other investors that were not approved. She made it clear that future deals would have to be along the same lines as earlier ones, noting that she is "troubled by the opacity of some of the ownership structures" of entities that have made unsuccessful bids.

Investors will have to prove that they intended to operate banks prudently and efficiently, with adequate capital levels. Shady backdoor deals with other businesses they own will not be tolerated and those acquiring banks must be willing to stick around through the crisis and make sure the firms are on solid footing before they fly the coop.

"I am particularly concerned with new owners' ability to support depository institutions with adequate capital, management expertise, and a long-term commitment to provide banking services in a safe and sound manner," said Bair. "Obviously, we want to maximize investor interest in failed bank resolutions. On the other hand, we don't want to see these institutions coming back."

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