Private Equity Briefcase

August 28, 2008

The SEIU's Glass House

It’s been almost a week since the Service Employees International Union called on this country’s bank regulators to reject “radical changes in banking regulation” proposed by private equity firms and asserted that true “arms-length transactions” cannot be carried out between a bank and its private equity investors.

The SEIU, though, would seem to have some “arms-length” issues of its own to work through on the West Coast given today’s report by the Los Angeles Times. The newspaper alleges that hundreds of thousands of union-member dollars were funneled to businesses owned by relatives of the president of the union’s largest California local—United Long-Term Care Workers—a matter the US Labor Department is investigating, according to the newspaper.

An organization that’s been engaged in a rather pitched public relations battle with the buyout industry over the past year, the SEIU proclaimed last Friday that its two million members were calling on regulators to reject “radical changes in banking regulation” proposed by private equity firms. It issued a Principles for Safe Banks and Fair Lending document that said financial investors in banks should be prevented from turning ‘passive’ investments in banks into controlling-stake deals: “Federal banking agencies should affirm and apply universally to all bank and thrift investors—whether individuals, partnerships, or corporations—the current 10% presumptive control standards.”

Isn’t that what government regulators are already doing?

If control-oriented investments were allowed, the union said, it would permit investment firms to access subsidized funding in the form of FDIC-insured deposits. In turn, private equity firms could obtain debt at a discount for leveraged transactions and would remain exempt from the oversight of bank holding companies, according to the SEIU, which also says special treatment from the Federal Reserve could open the door for private equity firms to assume little responsibility if a bank fails.

No one wants to see a bank fail, especially a private equity firm that has invested in a bank. It has a vested interest to make sure that its portfolio company doesn’t just not fail, but succeed. And, by the way what does the issue of obtaining corporate debt at a discount have to do with improving the working conditions and lot of SEIU members?

Not much, and nor does most of the issues raised by the SEIU’s Principles for Safe Banks and Fair Lending document. In fairness, the labor organization does raise a few noteworthy points. It broaches the notion that highly-leveraged bank deals with little or no downside for private equity funds invite more aggressive behavior. In light of the large number of dividend-paying leveraged recapitalizations carried out in the last three years, which has resulted in at least one bankruptcy, the notion isn’t that far off base.  

Nor is the idea that private equity firms that invest in banks must disclose any existing business, advisory and transactional relationships between the firms, their portfolio companies and the banks they invest in. The truth is that the notoriously opaque buyout industry, occupied by some very smart individuals, could use a bit more transparency.

But, the overriding issue that true “arms-length transactions” cannot be carried out between a bank and private equity firms rings, well, of poppycock. Based on the report in the LA Times, it might not be a bad use of time if the labor organization looked after its own organization’s transactions more closely rather than inserting itself into the bank investment and private equity regulation debate.