KKR, Blackstone: New rules on deals for failed banks are too strict

It looks like Wilbur Ross and John Paulson have some company.

Ross, who runs the private equity shop WL Ross & Co., and Paulson, the chief executive of hedge fund manager Paulson & Co., oppose new rules under discussion in Washington that would make it harder for firms like theirs to buy failed banks.

Now, as the window for public comment on the proposed changes closes, Kohlberg Kravis Roberts and the Blackstone Group (BX), two of the biggest private equity firms, say they too would probably be discouraged by the new rules from buying failed banks after they've been seized by the government.
In letters to the Federal Deposit Insurance Corp., they're pushing back against regulatory changes that would impose tougher standards on banks owned by private equity firms and hedge funds.

Because they are much more loosely regulated than other financial companies, the FDIC wants them to hold onto the banks for three years and maintain higher capital ratios to buffer against potential losses than are required for other banks.

Those requirements would be too onerous, Blackstone and KKR said.

"Setting the initial capitalization level at such a high level will place private capital investors at a fundamental competitive disadvantage to virtually all strategic bidders," Blackstone said in a letter to the FDIC (PDF), which Centerbridge Partners, Oak Hill Capital Partners and other private equity firms also signed.

In other words, the firms believe the changes will give an insurmountable advantage to healthy banks that want to buy their failed rivals.

Deryck Maughan, a partner at KKR, expressed similar concerns in a separate letter (PDF). If the new rules take effect, private investors would "impose uniquely high and restrictive conditions that will discourage their participation."

Private equity shops and hedge funds have teamed up to take over some of the bigger banks seized by regulators since the beginning of last year. Paulson, along with J.C. Flowers & Co. and a George Soros-run fund, among others, purchased IndyMac from the FDIC in January. And Ross, Blackstone and Centerbridge bought BankUnited in May.

As the new rules are currently formulated, they may discourage such deals in the future, wrote James J. Dunne III, the senior managing principal of Sandler O'Neill & Partners, a New York-based boutique investment bank that caters to financial companies.

"We do not yet see the necessary measures in this proposal to attract meaningful private capital Into the sector," Dunne said in a letter (PDF). "We fear that it would have the opposite effect."
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