George S. May Business Blog

Senator Jack Reed calls out the FDIC

Rhode Island Democrat and Senate subcommittee chairman, Jack Reed, is calling for the FDIC to come up with a set of guidelines for private equity firms that want to buy banks. Although the FDIC has already promised to provide “policy guidance” for such deals, the fact that Reed, who has been charged with overseeing Wall Street, has expressed interest may accelerate the process.

Reed said, in a statement to Bloomberg, basically that firms have been hopping around shopping overly risky activity until they can get a regulator to allow it. Senator Reed told Bloomberg that a new set of rules could put an end to that as currently there’s little to no coordination between regulators.

For those unaware, last week Florida-based BankUnited was seized and sold by the FDIC to a group of private equity investors, marking one of the biggest bank failures of the year. However, the Federal Reserve said that after Michigan-based Flagstar Bank was sold to a private equity-firm earlier this year, it wouldn’t sign off on any more similar deals. Reed’s stance is that should there be a succinct set of rules in place, communication from all parties should increase and probably clear the way for more of these transactions.

The bottom line is, whether we want to admit it or not, more banks will fail this year and in turn more private equity firms will be waiting. What Reed wants to do with the new set of rules is:

a) Give those banks a helping hand

b) Let private equity firms be able to make financially sound investments

c) Demand transparency from those private equity firms

“Private-equity firms are not transparent,” he told Bloomberg News. “There are potential conflicts with their other holdings, investors, management, and sources of funding, much of which is not disclosed.”

The real question now is, should part “c)” be included in the new set of rules, will there be as many private-equity firms stepping up to he job.

Likely not. As we have seen with the whole AIG bonus fiasco, the eye of the media, and thereby the public, is one that often offers more scrutiny than a big-money company is ready for.

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