Although the Federal Deposit Insurance Corp. has left open the possibility that private equity firms could buy failed banks, recent statements suggest that its thinking continues to evolve. Unfortunately for buyout shops, this evolution is making things more difficult for their ambitions of profiting from ailing banks.

The FDIC announced on Nov. 6 the failure of San Francisco's United Commercial Bank and its subsequent sale to East West Bancorp of Pasadena, Calif. Buried at the bottom of the announcement was a statement that could crush any lingering dreams buyout shops had that they'll be welcomed as buyers of failed banks.

In the FDIC's words: "The FDIC encourages private equity participation in failed bank acquisitions through private investment in established bank holding companies."

The unusual statement came because the FDIC wanted to signal that private equity had been involved in the deal, says a source. Although it wasn't publicly announced, East West received $131 million in financing from Corsair Capital LLC. The investment was part of a $500 million private placement by the bank, with the rest coming from existing investors. Corsair has taken a stake of less than 10% in East West and did not get a board seat.

Corsair chairman Nicholas Paumgarten declined comment. East West Bancorp representative Tom Tolda says East West didn't need financing to complete the UCB purchase. "The capital raise was added to existing capital," he says, and adds that the bank raised the money to present itself to the FDIC with "overwhelming capital" to make itself an attractive bidder.

Although one source says the FDIC's decision to include the private equity reference could be interpreted as a desire to tell buyout firms that it isn't completely opposed to participation, it's also possible to take a more jaundiced view. Anyone familiar with regulators' ways will realize that when the agency encourages, it really demands. In other words, the agency is telling private equity it can get into banking only by investing in healthy banks, then letting them bid for failing rivals.

Warburg Pincus is pursuing this strategy. The New York private equity shop made a two-part $115 million investment in Webster Financial Corp., a Waterbury, Conn.-based bank, in July and October. The private investment in a public entity, or PIPE, gave Warburg a 9.9% stake. Warburg can increase that stake to 24%, depending on shareholder approval and the conversion of warrants.

The FDIC's statement suggests we have seen the last deals in which PE firms successfully buy failing banks. That short list includes the January sale of failed California mortgage lender IndyMac Federal Bank FSB to a PE consortium led by Dune Capital Management LP chairman Steven Mnuchin, and May's sale of South Florida-based BankUnited Financial Corp. to a consortium led by banking executive John Kanas and WL Ross & Co. LLC.

In the East West announcement, the FDIC referred to its policy on private equity investment. The policy, announced in August, places larger capital burdens on banks controlled by private equity, forcing them to maintain a Tier 1 capital ratio of 10%. Although that's down from the 15% originally proposed, it's twice the 5% required of other banks.

One lawyer focused on the sector says the FDIC increasingly views capitalization of healthy banks as the way to inject needed money into the system. The lawyer says the FDIC has been hesitant to grant charters to prospective new banks and canceled several meetings with applicants early in the year as the crisis deepened.

The numbers bear this out. According to FDIC figures, the agency approved 28 new charters this year. That compares with 95 last year and 175 in 2007. This year's approvals are on track to equal the lowest total since 1994, just as the last effects of the savings and loan crisis were ebbing, with only 29 approved.

Also see:

Buyout blackball?
The scourge of private equity
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