Should Banks Invest in Private Equity?
Private equity was borne of Wall Street, but their relationship now is under regulatory attack. As we’ve discussed before, Chris Dodd's financial reform bill would prohibit banks from investing either directly or indirectly on the equity side of private equity deals (via the so-called Volcker Rule). Moreover, proposed Basel III language would make PE fund commitments difficult for any G20 bank, given the capital holding requirements for unfunded commitments. Private equity’s response to all of this has been a claim of systemic impotence: “Hey, we didn’t cause the financial meltdown.” And, to be fair, it’s a legitimate defense. Relatively few big buyouts have gone bust, and many deals (and funds) on life support last year are now breathing on their own. Moreover, most systemic risk posed by private equity relates to poorly-priced leveraged loans – a side of the business that no proposed legislation looks to curb. So let’s stipulate that the proposed rules to “break up” Wall Street’s bonds with private equity are unnecessary from the point-of-view of future economic cataclysm. Instead, let’s look at a deeper question: Will such regulations save the banks from themselves?
