NEW YORK, June 26 (Reuters) - The U.S. government should ease regulations on private equity investments in financial services companies to make more money available to the business and help stabilize the economy, two executives at the Carlyle Group wrote in The Wall Street Journal on Thursday.
“We are not contesting the long-standing policy of drawing a line between banking and commerce,” Carlyle Managing Directors Olivier Sarkozy and Randal Quarles wrote. “But the limitations on capital investment are far stricter than necessary to maintain these barriers, and can be amended by administrative intervention that is entirely consistent with the existing laws governing the country’s depository institutions.”
“In addition to increasing the industry’s cost of capital, these limitations increase the risk that taxpayers will ultimately be called on to assume some of these burdens,” Sarkozy and Quarles wrote, adding that private equity represents about $400 billion in available funds.
Finding money to prop up sagging financial institutions is a looming question these days. Big banks have sustained billions of dollars in losses in a credit crunch after they bulked up on risky mortgages that soured.
Quarles, a former treasury undersecretary in the Bush administration, and Sarkozy said the global financial services industry has sustained $350 billion in losses and cited some economists as saying another $1 trillion in losses could be on the way. Bear Stearns, in a fire sale to JPMorgan Chase JPM.N earlier this year, has been the biggest casualty to date.
The problem for private equity, they wrote, is that “an array of regulations and administrative interpretations limits private equity’s ownership and influence in regulated depository institutions. While these measures were largely designed to safeguard the separation of depository institutions from industrial enterprises, the policies underlying these rules have limited applicability to the private equity industry.”
Sarkozy and Quarles argue the law limits entities controlling commercial firms from owning more than 25 percent of the voting stock in a banking company, but in practice the limit is often lower if investors seek representation on company boards.
Current regulatory practice also would prohibit most of the common safeguards and governance rights for a private investor making a substantial new capital infusion, they wrote.
“But these restrictions can be easily amended to provide the financial-services industry with the necessary access to private sources of capital, while maintaining the requisite structural safeguards,” they wrote.
Private equity companies, they said, are not looking to make strategic investments that would let them concentrate power and give rise to conflicts of interest, Sarkozy and Quarles wrote. Instead, they are looking for financial investments for a limited period of time. (Reporting by Robert MacMillan, editing by Maureen Bavdek)
Our Standards: The Thomson Reuters Trust Principles.