In the wake of the BankUnited deal, private-equity firms are crowing about their
prospects for getting into the banking biz.  We understand this – the deal is awesomely
generous on its face and sure to be hugely profitable going forward unless the investors
screw up to unimaginable proportions.  However, we don’t expect the PEs to get their
cake and eat it too – that is, not only to be allowed to buy banks on no-fail terms, but also
to be allowed to take control of the banks they buy.  Here, the Fed is standing firm and
we doubt it can be persuaded to budge.   
Why is this?  First, there’s the Fed’s longstanding unease with non-traditional owners.  
The PEs are trying to blow this off by a combination of persuasion and political force,
pushing for what is called the “silo” strategy.  Here, the private-equity firms wall off the
bank in a separate unit from their other ventures, insulating it they argue from all the
conflicts and risks otherwise inherent when a commercial venture owns a bank.     
The Fed isn’t buying this, though.  It frankly doesn’t trust the PEs to keep the banking
corn in the silo, worrying about the porous nature of legal restrictions in complex
organizations.  The FRB is also deeply uncomfortable with any structure, especially for
larger insured depositories, without a source of strength at the top.  To the degree a firm
controls an insured depository and engages in other activities, the Board wants a
regulated entity under its thumb at the top of the corporate org-chart to make up any
losses that could come from undue alliances between the bank and its affiliates.
The PEs think these fears are warrantless and they’ve got friends with force to press their
cause.  Here’s where we come to the second reason we think the FRB will stand firm:  
big-bank blow-back against the PEs.  Ordinarily, the biggest financial institutions are
huge buddies of the private-equity firms – how else would the PEs have come so far?  
However, when it comes to PEs getting into their business, the banks aren’t buying.
There are two reasons for this.  First, no one needs competition and the banks know all
too well how formidable the PEs will prove, especially if allowed to take over big banks
without burdensome holding-company capital, management and activity restrictions.  
Beyond this, though, is a sound strategic insight:  if the PEs take over more than a few
failing banks on advantageous terms, Congress will take its debate over reinstating Glass-
Steagall and go the industry one better.
So far, all the talk about somehow disentangling banking from other business lines is just
that.  However, it’s serious talk, as every hearing on regulatory reform makes clear.  It’s
also talk from at least one important speaker, Paul Volcker.  Thus, the banking industry
knows that it will do well just to hold its own and continue the diversified holding-
company powers authorized under Gramm-Leach-Bliley in 1999.
The more big PE bank deals, the bigger the battle over banking vs. commerce.  The
bigger the battle, the more the banks have to lose, especially secure in the knowledge that
Congress will grandfather any PE transactions done before the Hill gets around to this.  
That could leave big banks in a lose-lose position – stripped of their links to securities,
insurance and other lucrative activities even as the PEs are let loose to plunder with
charters they get to keep..