Monday, July 7, 2008

Desperate Banks, Desperate Fed

"The [Fed] may soon make it easier for private-equity firms and others to invest in the nation's ailing banks, according to people familiar with the matter. ... The move comes as regulators grow increasingly worried about the ability of many banks to replenish capital amid the worst banking crisis in decades. ... Fed officials have recently met with big buyout firms--including J.C. Flowers & Co., Carlyle Group, Kohlberg Kravis Roberts & Co. and Warburg Pincus--and banking lawyers to discuss the obstacles, according to people familiar with the matter. ... For example, the Fed recently has been reluctant to approve deals involving private-equity firms' owning more than 9.9% of a bank unless the buyers agree to limit their voting power and not have more than one seat on the bank's board. ... 'If we don't facilitate private equity's role in that, there's one less pool of capital to stand between these losses and the taxpayer,' said Randall Quarles, a managing director at Carlyle and a former senior U.S. Treasury official, who has been in discussions with the Fed", my emphasis, WSJ, 27 June 2008.

What's going on here? If the Fed wants to bend or break rules to accommodate "former" Treasury officials, it will. Look at JPMorgan's $29 billion bailout. My surmise: the private-equity firms told the Fed they will not put any money into banks without the Fed ponying up much more. Quarles is a "former" Treasury official. How nice; Henry Paulson is a "former" Goldman Sachs official. How smart is Quarles? Who knows? Was he short say "C" a year ago? Or long commodities? Or euros? What does "if we don't facilitate private equity's role" mean in English? My translation: Carlyle won't put a dime in "C", "LEH", or "NCC" unless the Fed puts in, 10, 20 or is it 30 times as much subordinated to Carlyle's position. Am I about right Randy?

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