Dec. 29 (Bloomberg) -- J.C. Flowers & Co., Dune Capital Management and Paulson & Co. are leading a group of private- equity and hedge-fund investors seeking to buy failed lender IndyMac Bank, said three people familiar with the transaction.

The bidders are close to an agreement with the Federal Deposit Insurance Corp., which seized the lender in July, said the people, who requested anonymity because the negotiations are continuing. An announcement could come by the middle of this week, the people said.

U.S. regulators are relaxing 50-year-old banking rules amid a financial crisis that has wiped out 25 institutions this year and threatens at least 171 more. The Office of the Comptroller of the Currency, the Federal Reserve and the FDIC this year all changed rules that may help spur investments by private-equity firms, a largely untapped potential pool of capital for banks.

“It’s generally a very positive sign,” Wayne Abernathy, executive vice president for financial institution policy at the American Bankers Association, said today in Washington. “People who are in the investment world who have been holding their money back in the recent weeks are recognizing that when the dust settles, that the place to put your money is the banking industry.”

The investor group would buy all of Pasadena, California- based IndyMac, and run it as a savings and loan under new name, one person familiar with the deal said. IndyMac has 33 branches, a reverse-mortgage unit and a $176 billion loan-servicing portfolio. IndyMac has about $6.9 billion in deposits and $16.5 billion in net loans and leases.

Year-End Announcement

“We have not made an announcement on a buyer outside of saying that we expect to make one by year’s end,” FDIC spokesman David Barr said in an e-mail yesterday. Andrew Gray, FDIC director of public affairs, declined to comment today.

J. Christopher Flowers, the firm’s founder and Dune’s founder Steven Mnuchin couldn’t be reached for comment. A spokesman for Paulson declined to comment.

Flowers, Mnuchin and Paulson have applied for a federal holding company charter and plan to turn IndyMac from a mutual savings bank to a stock-held institution, the Wall Street Journal reported today, citing an unidentified spokeswoman for the Office of Thrift Supervision.

The FDIC is considering a sale to the group, pending an OTS letter of intent, and is ‘talking about” completing a deal by late January or early February, the newspaper reported, citing the OTS spokeswoman.

FDIC Advisers

Deutsche Bank AG and Barclays Capital Inc., the investment banking unit of London-based Barclays Plc, are advising the FDIC on the sale.

The agency seized the lender in July and has been seeking a buyer. Unpaid mortgages left IndyMac short of cash, triggering a run on deposits that drained $1.3 billion in 11 days ending with the U.S. takeover on July 11. The bank was among 25 to collapse this year amid losses from mortgages.

IndyMac’s failure will cost the FDIC’s deposit insurance fund about $8.9 billion, the agency said Aug. 26.

In September, the Federal Reserve, seeking to clarify rules for investors buying stakes in banks, issued revised guidelines stating that investors may be able to own as much as 33 percent of a bank and have as many as two board seats without being subject to bank-holding company regulations.

The Office of the Comptroller of the Currency in November created a new charter, called a “shelf charter,” to find buyers for bank assets. The FDIC on Nov. 26 said it would start letting investors without a charter bid on failing institutions.

Investor Interest

Investors from Carlyle Group, the Washington-based private equity firm, to billionaire Wilbur Ross have expressed interest in investing in troubled banks. Flowers in August won regulatory approval to personally buy a Missouri bank. He may use the First National Bank of Cainesville, with $14 million in assets, as a vehicle to buy other troubled or failing institutions.

Flowers’ firm raised $2.5 billion for a buyout fund that targets banks and other financial firms, people with knowledge of the matter said in September.

John Paulson’s $13 billion Advantage Plus fund, his largest fund that’s designed to bet on takeovers, restructurings and other corporate events, rose 33.5 percent this year through November, Bloomberg data showed.

Paulson, 53, in September was considering buying newly issued shares or convertible bonds in financial institutions that need capital, the Financial Times reported Sept 8.

Dune was co-founded by Mnuchin after he left Soros Fund Management LLC in late 2004. Mnuchin was head of a unit at Soros that provided financing, including mezzanine, asset-based and real-estate loans. The team also traded distressed debt.

Prior to joining Soros in 2003, Mnuchin, 46, was vice chairman of ESL Investments Inc., the hedge-fund firm run by Edward Lampert. ESL is the largest holder of Sears Holdings Corp., on whose board Mnuchin sits.

Before ESL, Mnuchin spent 17 years at Goldman Sachs Group Inc., becoming a member of the firm’s management committee. He retired from Goldman at the end of 2002.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net

Last Updated: December 29, 2008 15:11 EST