Senator pushes regulators on rules for private equity bank deals

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Senator Jack Reed, a Rhode Island Democrat and chairman of a Senate subcommittee charged with overseeing Wall Street, wants the Federal Deposit Insurance Corp. and other financial regulators to come up with rules for private equity firms that want to buy banks.

Reed's interest in the matter may give the FDIC an incentive to quickly fulfill a promise it made to provide "policy guidance" for such deals after seizing Florida-based BankUnited and selling it to a group of private equity funds last week in the biggest bank failure this year.

Firms are "shopping around a potentially risky activity until they find a regulator who will allow it," Reed wrote, according to Bloomberg News.

New rules might help stop that, especially since there's little coordination evident between regulators right now. BankUnited was the second bank this year to be sold by the FDIC to a group of private equity investors (IndyMac was the first). But neither has a controlling stake. The Office of the Comptroller of the Currency, which oversees banks with a national charter, approved the outright purchase of Michigan-based Flagstar Bank by a private equity firm earlier this year, but the Federal Reserve has said it wouldn't sign off on any further deals like that one.

All other things being equal, new rules would probably clear the way for more of these transactions. With plenty more banks likely to fail before the financial crisis passes, PE firms will likely have many more opportunities.

Reed clearly sees a need to make it easier for private equity firms to buy banks. But he'd like to see rules that give regulators and the public a better idea of how they make their money.

"Private-equity firms are not transparent," he told Bloomberg News. "There are potential conflicts with their other holdings, investors, management and sources of funding, much of which is not disclosed."

If they are forced to reveal all, will this scare off some otherwise willing private equity buyers? This will surely be the subject of lots of debate as the rules take shape.

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