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Friday, June 27, 2008
Fed to Help Banks with Private Equity Leeway
FOXBusiness
The Fed may make it easier for firms to invest in struggling banks, according to a report by the Wall Street Journal.
Officials at the Fed have met with buyout firms J.C. Flowers & Co., the Carlyle Group, Kohlberg Kravis Roberts & Co. and Warburg Pincus to discuss the hurdles they face for investing in banks, according to the Journal.
A loosening of investment rules could bring lenders besieged with credit woes closer to the capital they need. Particularly
smaller lenders have struggled to find new investors, but federal regulations have prevented private equity firms from infusing
too much cash into banks.
Since the credit crunch hit, banks have found money in a variety of places, including government investment funds, mutual
funds or public offerings of stock or other securities, the report said.
Banks have turned to such places for funds because of heavy regulations that say any entity (such as a private equity fund)
that may own 9.9% of a bank, must subject itself to regulatory scrutiny. Furthermore, only entities registered as a “bank
holding company” can own more than 24.9% of a bank, and must serve as a "source of strength" for the bank, according to the
Journal, which cited federal regulations.
If the Fed wants to make it easier for private equity firms to invest, they will need to interpret these laws differently,
and determine if the firms should be allowed to have more than one seat on a given bank’s board, according to the Journal.
However, even if private equity firms are allowed to have a more active role with banks, it’s still unclear if they will invest.
FOX Translator
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Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
