Private Equity's Regulatory Arbitrage

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Call it regulatory arbitrage.

Bloomberg reports today that the Office of Thrift Supervision gave buyout firm MaitlinPatterson Global Advisers the OK to buy Flagstar Bancorp, a struggling bank in Troy, Michigan. The lesser-known agency, which oversees thrifts in the U.S., seems to have a different set of rules than its all-powerful sibling, the Federal Reserve, which oversees national banks. The Fed has indicated that it won’t allow private equity companies to buy a majority stake in a bank—although it does allow individuals in the private equity business to buy banks.

Is that the best stance for the Fed to take in these troubled economic times?

Banks—big and small—are in desperate need of capital. And private equity firms are sitting on roughly $1 trillion in cash, as BusinessWeek recently reported. Buyouts shops are sniffing around the sector for investment opportunities—and seem to be eager to put that money to work. Carlyle, W.L. Ross, Blackstone, and Centerbridge are in a mating dance with Florida’s BankUnited. Lightyear Capital, run by former PaineWebber CEO Donald Marron, is scouting out deals across the U.S. At the ACG InterGrowth private equity conference last week in Las Vegas, there was plenty of chatter among top mid market PE players about the good buys.

The Fed’s rules only hamper their moves. In this environment it would be smart to relax the regulation as the OTS has done. Sure, the government infusion of capital has helped U.S. banks. But the industry won’t fully recover until private investors start pumping capital into financial companies as well. And the government should be doing all it can to encourage private investment—rather than inhibiting it.

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