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Constraints on private equity stakes in banks loosened

With all the furor on Wall Street, I haven’t heard much discussion of an interesting article in Tuesday’s WSJ. Private equity can now own a much higher percentage of a bank without being considered a controlling investor. The new rules also allow such investors to hold up to 2 seats on the board of directors, and remove a prohibition against noncontrolling investors having direct conversations with bank executives.

According to the Journal, the original act establishing the regulations was designed to prevent commercial interests from having a conflict of interest by exerting too much influence over a bank (think Mr. Potter in “It’s a Wonderful Life”). Private equity firms have been lobbying for the change for a couple of years, but the current financial crisis was what pulled the trigger. The Fed said the amended policy is designed to encourage private equity and bank holding companies to provide capital to struggling banks. A copy of the new policy can be found here.

At a time when we need all the stability we can get, why isn’t it more reassuring to think of KKR and the Carlyle Group being able to have more influence over the U.S. banking system????

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