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The financial industry has now experienced losses of over $400 billion as a result of the credit crunch and this is expected to continue. All manner of measures are being executed to try to hold up the financial institutions close to collapse. One of the latest ideas being promoted by US private equity firms is to remove regulation to make it more attractive for private equity to invest in struggling financial institutions. This suggestion comes at a time when world wide governments and regulators are considering increasing regulation. The proposal by private equity has sparked vigorous reactions in the US.



An editorial in the New York Times on the weekend claims private equity’s interest in relaxing regulation to invest further in banks is ‘exploiting the desperation of banks and regulators’. Banks need to raise capital quickly and private equity injecting funds into the bank would be a much easier choice, rather than selling more debt at a greatly reduced rate. Private equity can currently offer around $400 billion of capital to the banks immediately. The rules that are deterring their investment in the US are as such:

- Investment firms which own more than 25 % of a bank are subject to all banking regulation.

- Firms with shares of 10-25% are unable to control the bank’s management., investors with less than 10% may choose to place a director on the bank’s board.

- ‘Source of strength’ references hold controlling investors accountable to unlimited liability of a bank’s loss.

Private Equity is arguing that the rules should not apply to them as the intention of the regulation is to prevent concentration of economic power and conflict of interest. Private equity’s interest is only short term and therefore it would have no affect on them. Unions disagree with this simplistic argument and are concerned that the typical behaviour of private equity involves high risk practices that could be detrimental to the banks and their employees. Private equity has made no public commitment to any socially responsible investment practices and if regulation is lifted they would be permitted to take whatever means to extract profit and exit quickly.

UNI Global Union represents employees in the financial sector and urges the US Federal Reserve to maintain regulation that prevents private equity from have controlling stakes and increased flexibility in banks. UNI has been working with global bodies such as the Trade Union Advisory Committee to the OECD (TUAC) to encourage regulation on private equity practices in all industries. Encouraging private equity investment in banks might seem like a quick fix for banks to raise capital, but could potentially add to the credit crisis in the banks. The crisis is already putting pressure on a family’s ability to make ends meet and keep a roof over their heads. Private equity in the banking sector could make this worse.



Analysts are increasingly nervous about predicting the quantity of lost capital that is yet to come and when investor confidence will be restored. Secretary General of OECD, Angel Gurría predicts the losses will continue through 2008. 2009 will be a year of recovery with no growth and by 2010 markets will begin ‘normal growth’. The urgency at this point in time is to assist the financial institutions to find new capital, but at what risk?



To read more: http://www.nytimes.com/2008/08/03/opinion/03sun1.html?_r=2&oref=slogin&oref=slogin