Private-equity firms’ rules to buy banks

Ashley Milne-Tyte Jul 2, 2009
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Private-equity firms’ rules to buy banks

Ashley Milne-Tyte Jul 2, 2009
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TEXT OF STORY

BOB MOON: On paper it looks like a marriage made in heaven. Banks need lots of money and private-equity firms have got plenty of cash. But not everyone’s overjoyed at the idea of private equity getting involved in banking. Today the FDIC announces some new rules on how bank buyouts by private-equity firms should go. Ashley Milne-Tyte reports.


ASHLEY MILNE-TYTE: Private equity firms have already bought at least two banks. And they’re hungry for more. Patricia McCoy teaches law at the University of Connecticut. She says some in Washington are worried about that.

PATRICIA MCCOY: One of the concerns about private equity is that it has a short investing horizon, which would focus on short-term profitability. The question is does short-term profitability come at the expense of long-term health of the bank?

A private equity firm buys a bank with a little of its own capital and a lot of debt. To pay the interest on that debt McCoy says the bank needs to generate good profits.

MCCOY: Higher profits always come with a price. They imply higher risk.

And taking too much risk got banks into this mess. McCoy says the FDIC will likely tell private equity firms if they buy a bank they’ll have to hold onto it for a minimum period. That should encourage firms to build their banks into solid businesses before selling them on.

I’m Ashley Milne-Tyte for Marketplace.

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