Private equity funds (except for specialists like Chris Flowers) seldom make investments in banks, and for good reason. They are regulated businesses with complex, integrated overhead structures that don’t lend themselves to the sort of cost cutting and breakups that are easy ways for LBO firms to unlock value.
On the one hand, with sovereign wealth funds turning a cold shoulder to requests for further cash from strained financial firms, the recapitalization of the banking industry will have to come largely from domestic sources, so the TPG move in theory is a positive development. On the other hand, if like the SWF, they have merely acquired the right to lose money, TPG and any “me too” deals could be the last private sector hurrah before banks start resorting to more desperate measures (dividend cuts, asset sales despite the weak market for banking businesses, rights offerings).
If I were in TPG’s shoes, I’d wait for banks to hive off large businesses. These are easier to evaluate and (for them to be saleable) would have to have only a limited direct exposure to the mortgage crisis.
I anticipate TPG will come to regret this deal.
From the Wall Street Journal:
Private-equity firm TPG and other investors are close to a deal to invest $5 billion in Washington Mutual Inc., people familiar with the matter said Sunday.
The injection of new capital would allow the country’s largest savings and loan to ease its pressing capital requirements, the people said, amid punishing losses from the national mortgage crisis. But it would substantially dilute current WaMu shareholders, who have already lost 74% of their investment over the past year. WaMu’s market capitalization on Friday was just under $9 billion, after its shares dropped 11% that day…..
While banking regulators were likely apprised of WaMu’s plans, the government was not directly involved in forging a deal as in the recent purchase of Bear Stearns Cos., say people familiar with the matter.
As currently envisioned, the $5 billion investment would be structured as both a common- and preferred-stock offering. The preferred stock could be converted into common shares in the future, subject to a shareholder vote. TPG — formerly Texas Pacific Group — is expected to maintain a “substantial minority holding” in WaMu, said one person familiar with the matter, though exact terms weren’t clear. The amount is expected to fall under 25%, a threshold that would require TPG to register as a financial holding company under government rules…..
And there is the remaining question of whether a $5 billion investment will be enough to cover all the thrift’s capital requirements in the future, especially if the mortgage-backed-securities market continues to deteriorate.
Declines in those securities have hit WaMu hard. The thrift reported a $1.87 billion loss in the fourth quarter that was fueled by a sharp increase in the reserve for loan-related losses. The company has been exposed to some of the hardest-hit housing markets in the U.S., including California and Florida. Problems have also spread to credit cards and other types of loans, meaning WaMu has been bracing for a steep rise in loan chargeoffs.