The Office of the Comptroller of the Currency decided for the first time on Friday to allow private equity firms to bid on failing banks, just as three of were closed down by the FDIC.

The first charter recipient is Hilltop Holdings, led by the other Gerald Ford.

Hilltop brings $1.38 billion to deploy, not enough to secure ownership of the biggest of the banks, such as Washington Mutual, but certainly enough to buy out smaller fish. Among Hilltop's previous investments was a minority stake in Downey Financial, one of last week's closures.

Previously, the Federal Reserve had allowed private equity funds to purchase up to a 25 percent stake in banks, but stopped short of permitting ownership. Rather than amending the Fed's ruling, the OCC skirted the decision by creating a new type of banking charter, known as a "shelf charter." Under the agreement, "investors like Hilltop must form a bank-holding company, make arrangements to obtain FDIC insurance and within 18 months identify a failed financial institution it would like to purchase." The objective of OCC's initiative is to allow a wider range of investors to put capital in the banking sector.

OCC Chief Counsel Julie Williams insisted that "not just anybody can come in and get a charter." That hardly means every sale will result in a successful bank. Because the private equity fund ends up owning the bank's stock, the managers are able to make strategic decisions unilaterally (as opposed to executives at public companies, who require the vote of shareholders for major actions). Skilled managers with industry experience may be able to take painful but necessary steps, killing revenue-generating but unprofitable product lines or selling off underperforming units.

Some privately owned companies have outperformed their public peers; others have not -- and the net result is that the returns are roughly equal. While private equity-owned banks could turn out to be some of the great successes of alternative investment, they may turn out to be the next entries in a long list of failures.

categories: Players

4:41 - November 24, 2008

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