Lost amidst all of the talk about bank nationalization, capital ratios and executive jets is any discussion about how the free market can help stabilize the faltering banking system. That's until Treasury Secretary Timothy Geithner mentioned it today.What people forget is that the Troubled Asset Relief Program is supposed to be temporary. Yes, I know $700 billion seems permanent, but it's not. Banks are supposed to pay the government back with interest once the economy improves and their toxic assets become something people want. The only way that this is going to happen is with private money.
The reasons why private investors are on the sidelines are many.
For one thing, the terms being offered to distressed banks by the government are far more generous than the private sector could afford. There also are rules restricting the amount of interest in banks by private equity firms. Regulations that triggered bank holding company requirements for private investors were eased last year to 33% from 25%. That's provided that no more than 15% represents voting power.
Meanwhile, wealthy individuals such as billionaire Wilbur Ross are buying up small regional banks and probably would purchase more if the government's rules were clear. Ross already has raised $4 billion and acquired a financial institution in Florida. Private equity tycoon J. Christopher Flowers acquired a bank in Missouri. Still, Ross and other investors would like the ownership rules eased further.
The government also has the right to change the terms of any co-investments deals it has with private investors, something that turns many of them off. Many funds are raising money to buy distressed assets, and a limited number of deals have been done.
However, for the TARP to work, the government needs to remove the impediments that are discouraging deals from being done. Otherwise, Uncle Sam will be in the banking business much longer than necessary.
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