FDIC: Private Investors May Buy Failed Institutions
STEVE INSKEEP, host:
NPR's business news starts with new rules for buying banks.
(Soundbite of music)
INSKEEP: This story is a reminder that whenever somebody is losing money, somebody else may be able to make it.
A failing bank can be an object of desire for those private equity investment firms, the giant funds that buy up troubled companies, try to turn them around, sell again for a profit.
Private equity firms are now sniffing around the banking landscapes for opportunities, but they've come up against resistance from bank regulators.
Yesterday a top bank watchdog, the Federal Deposit Insurance Corporation came up with some new guidelines for how private equity firms could take over banks.
From member station WNYC, Lisa Chow has more on the growing role of these investors in our economy.
LISA CHOW: More than 80 banks have closed so far this year, that's the most since the height of the savings-and-loan crisis in the 1990s. The growing number has drained the FDIC's insurance fund so the regulator is looking for a way to drum up some cash, or better, find buyers for these banks.
Here enters private equity, an industry that in recent years has gotten a bad reputation. Critics say it takes too many risks and its managers charge huge fees. But private equity funds have what many banks now need.
Mr. DOUG LOWENSTEIN (President, Private Equity Council): Private equity firms, today, on a worldwide basis, have close to 500 billion dollars ready to invest.
CHOW: Doug Lowenstein is president of the Private Equity Council, a key lobbying group for the industry.
Mr. LOWENSTEIN: And it seems to us that some of that capital can and should find a home in helping to recapitalize the banking sector, which is starved for capital.
CHOW: Lowenstein says pairing private equity with troubled banks makes a lot of sense - beyond the money issue. Many private equity funds specialize in buying struggling companies and making them profitable. For example, in 1992 the private equity firm Thomas Lee bought Snapple for 135 million dollars, built up the brand and then two years later, sold it to Quaker Oats for more than 12 times as much, 1.7 billion dollars.
Professor JOSH LERNER (Harvard Business School): Snapple was a company which put tea in a bottle and sold it, which doesn't seem like rocket science.
CHOW: Josh Lerner is a professor at Harvard Business School and an expert in private equity.
Prof. LERNER: When Thomas Lee basically came and bought a controlling interest in the company, they did a wide variety of things in terms of both increasing the sophistication of management, putting in resources for marketing and other endeavors. It was also a situation where the company itself grew considerably in terms of sales, profits, and employment during the time that the private equity group owned it.
CHOW: But Lerner says there have also been spectacular failures. The private equity firm Cerberus bought Chrysler for more than seven billion dollars in 2007. The car company this year filed for bankruptcy.
Among the industry's critics are organized labor and community activists who accuse private equity of only looking for a quick profit. Dan Cantor is executive director of Working Families, a political party in New York State.
Mr. DAN CANTOR (Executive Director, Working Families): They have not shown an interest in serving the public good and they have a record of stripping assets for their own enrichment.
CHOW: Wilbur Ross is a private investor. He defended his industry, saying profits are shared by all fund investors including public and private pension funds.
Mr. WILBUR ROSS (Investor): It isn't like a couple of fat cats are simply dividing up whatever profits get made. It really goes into the retirement funds of the average American.
CHOW: Ross is gearing up for the new opportunities. He bought a failed bank in Florida last May and plans to buy more. But it's still not clear how many other private investors will jump into this market, and whether banks purchased by private equity firms will recover.
For NPR News, I'm Lisa Chow in New York.