Forbes – Toe In The Water
By Bernard Condon and Nathan Vardi, March 2, 2009

HIGHLIGHT: Buyout firms have barely touched the billions they’ve set aside to invest in struggling banks. Will the new bailout plan finally do the trick?

Gerald Ford made a fortune investing in banks when they were failing en masse 20 years ago, and he intends to do so again–if only he can find one that is worth buying. “They’re broke,” says Ford, 64, who for two years now has pored over the books of banks desperate for his money. He has hardly spent a dime of his $2 billion kitty.
Buyout firms and other private investors are sitting on anywhere from $450 billion to $1 trillion that they are ready to use to buy banks and/or their crummy assets. Thirty funds have been formed to buy beaten-down financial assets. But while poking around in balance sheets they sit and await, as Ford puts it, “a government solution.” The measure of whether Treasury Secretary Timothy Geithner’s bailout plan will work will be if it finally gets private investors to take the plunge.
What buyout barons want to avoid is the fate of TPG chief David Bonderman, who led a group that invested $7 billion in Washington Mutual last year, only five months before the bank failed. An early sign the government will give big investors what they want: last month’s deal to sell failed IndyMac Bank for $14 billion to a consortium fronted by Dune Capital Chairman Steven Mnuchin. Not only are the feds lending Mnuchin’s crew money for the purchase, they’ve agreed to absorb nearly all IndyMac’s losses on dicey loans should they rise above 20%. Several big buyout firms say that’s the kind of deal they’d jump at–hence Geithner’s need to include in his plan a way to limit potential losses for investors.
Thomas Barrack of Colony Capital in Los Angeles made a killing buying bad real estate loans during the savings and loan crisis and, later, restructuring Asian financial firms. This time he’s got $3 billion to spend but hasn’t bought anything. Barrack has been waiting for the feds to come up with a bad bank that would work with investors to purchase bad assets. In the last three months he signed nondisclosure agreements with four community banks, scoured their books and spoke to the regulators but still was unable to figure a value for their bad assets. “It’s terribly frustrating,” he says.
What if he had got comfortable with their balance sheets? He might have walked anyway because of regulatory restrictions. Though the Fed recently loosened rules governing bank investors, buyout firms still can’t own more than 15% of voting shares without potentially having all their holdings open to regulatory oversight. They’re also restricted in the number of directors they can place on a board. Bonderman, for all his cash, got only one seat at WaMu.
“Why put money into a bank today if there will be more favorable rules tomorrow?” wonders John Eggemeyer of Castle Creek Financial. He has bought 54 banks in 15 years but none in the last 21/2.
As more banks start to fail, the government will probably bend the rules. In late January David Matlin’s $9 billion distressed investment firm, MatlinPatterson, worked out an inventive deal with regulators in its purchase of 70% of struggling Michigan thrift Flagstar. MatlinPatterson agreed to keep its other investments separate from Flagstar, while regulators agreed not to scrutinize its holdings. The firm also got the right to appoint the majority of Flagstar’s board. A bonus: Treasury invested $267 million alongside Matlin’s $250 million. Says Flagstar Chief Financial Officer Paul Borja: “You have to structure [deals] in a way that allows private equity to have comfort.”