I play in bank stocks. Christopher Flowers is a name I see again and again.
He is a private equity guy - and he buys banks. Big banks. Lots of money. And superficially that is appealing from a policy perspective. After all private equity (Carlyle, Flowers, Cerberus et al) have capital and the government is usually pleased when new private capital comes into banks in the height of a banking crisis. The issue was played in the New York Times (hat tip to and some decent analysis from Felix Salmon).
Its just that private equity make very unsuitable owners for a bank. Frightfully unsuitable.
The problem is that banks take guaranteed deposits (or at least deposits that need to be bailed out if the bank is insolvent) and private equity owns a whole lot of levered buy-outs and the like. And if a small private equity firm owns a bank it could become a large private equity firm by lending to related parties. There are very few entities as complicated and with as many conflicts as a large PE firm borrowing money from banks they control.
Mr Flowers puts his case in the New York Times article:
“I don’t think the Republic is going to be brought to its knees if private equity owns banks, personally,” Mr. Flowers said from his Midtown Manhattan office with its expansive views of Central Park. “We invest around the world — Japan, Germany, England, no problem.”
Effectively he says the conflicts can be managed.
Well – if you really want to be sure of that just go have a look at the results of Shinsei and Aozora. These were Japanese banks with controlling stakes from Flowers and Cerberus respectively. When Aozora floated it had made very good profits by investing in other American private equity ventures.
Flowers also invested in relatively risky structures in the US and Europe through his effective control over Shinsei. Indeed the memory is very short – this Bloomberg article talks about Shinsei’s and Aozora’s recent results in the light of this conflict of interest. It seems the bailout of Japan’s banks last time caused a sowed the seeds for another round of problems in Japan’s banks. The New York Times alludes to this conflict of interest – but the conflict of interest has been around a long time – in good times and bad. Aozora’s float – laden with what were then private equity profits – was years ago. These guys are hardened professionals at conflict of interest in banking.
Or as the Bloomberg article puts it:
Shinsei racked up profits in its first six years under foreign ownership. The bank gave funds to J.C. Flowers to invest and had no discretion where Flowers placed the money, Flowers said. Neither Shinsei nor Flowers would give the amount.
The New York Times notes that the Federal Reserve strictly controls who can own a bank – and for good reason. They also note that Mr Flowers has hired top tier Washington Lobbyists to try to get regulatory changes that suit him.
If he manages to get Washington to listen to him then I fear for your republic. This might not – as Mr Flowers notes – bring the Republic to its knees – but it is another step on the way to lemon socialism owned and controlled by the plutocracy.