Here are the much anticipated (and more than likely useless) results from the Fed’s stress test of U.S. banks. Whew, disaster averted!
Speaking at the Super Return private equity conference in Dubai, Henry Kravis, co-founder of KKR, said he sees the problems in the banking sector beginning to stabilize. He also predicted consolidation in the banking industry over the course of the next year. Kravis is convinced that private equity can be a solution to the banking crisis, not just in terms of capital which so often mentioned, but also, and perhaps more importantly, in regards to strategy and operations (which as I’ve often pointed out is the true edge of private equity even after the easy credit is long gone). Kravis also suggested that PE firms should look at partnering with non-private equity groups when they choose to invest.
I think true stabilization in the banking and financial service sectors will only come when the various government initiatives actually get implemented. So far it’s been a lot of political talk and papers being signed. Most of the money has been dished out yet. Only when the cash tap begins to flow will we see how effective these “bailouts” are.
Any kid growing up in the age of Disney knows the story of how one nanny perched on a cloud changed the lives of the Banks family (no subtle surname for these characters). What’s also been discussed of late by writers on both sides of the pond is how the famous scene concerning the run on the Fidelity Fiduciary Bank, instigated by Michael’s refusal to offer his tuppence to the elder Mr. Dawes can teach a thing or two to today’s befuddled bankers. Just don’t try and learn Dick Van Dyke’s abhorred cockney. Here’s the scene for your inner-child’s viewing pleasure:
Here’s an excellent chart depicting the calm before a banking storm. The graph comes from a research report published earlier this month by the International Monetary Fund. I’ve attached it for your reading pleasure.
Extended periods of stability can lead to some violent turbulence once the bubbles finally do burst.
Simple, sound advice often stands the tests of time. Financial history is full of such examples. The following has been sourced from Daring Opinion by Elie Elhadj.
In December 1863, Hugh McCulloch, then newly appointed U.S. Comptroller of the Currency and later the U.S. Secretary of the Treasury, wrote a letter to American banking institutions. Here are some excerpted highlights:
- Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
- Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
- If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
- Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
- The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
- Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.
In all the commotion and hullabaloo surrounding the events effecting the financial world these past few weeks, little attention has been paid to the Federal Reserve relaxing rules concerning minority ownership of banks by Private Equity investors and other investment groups, allowing them to own up to 33% of a bank’s equity, including 15% of the voting shares.
Thus far banks have had to raise more than $350B thanks to write-downs in excess of half a trillion dollars, and the need for further infusions of capital is certain. With these lowered restrictions Private Equity firms could provide much needed additional funding. Look for Private Equity firms to invest in small and medium sized banks as funds won’t wish to put all their eggs in one large bank basket, especially after witnessing the difficulties that TPG has experienced with WaMu.
Moving the ceiling up to 33% is a step in the right direction, but it’s not enough to make PE a viable source of rescue.