Although they won’t vote on the final rules until next Wednesday, the FDIC provisions for private equity acquisitions of banks are leaking out. As expected, the government stared the PE guys in the eyes and blinked.

According to the WSJ, the agency will soften the amount of capital that a bank owned by PE must maintain from 15% to 10% and also tone down the requirement that the the acquiring firm backstop the bank should it run into financial difficulties. What wasn’t mentioned and will be critical is what kind of rules are put in place that restrict the ability of PE acquirers to use the bank to fund their own deals.

This was probably an inevitable development. Given the accelerating pace of bank failures and some big problems that have to be addressed right now — Guaranty Financial and Corus Bank — the FDIC is caught between a rock and a hard place. They have reportedly been having trouble attracting a lot of interest in smaller banks they’ve recently placed into receivership and need more bidders. It’s a good indication as to how deep the problems run.

Private equity has less than a stellar record when it comes to bank ownership. Several larger Japanese banks were acquired by PE firms as was one German bank. They have all required government assistance after running into substantial problems resulting from investments that they made in their PE owners’ deals. Let’s hope that at least we can avoid that pitfall. If not, we’re just trading help now for problems down the road.

more: here (my previous post with further links) and here (link to Bronte Capital post on the subject)