Private Equity Firms Ride Scorpions to Bank Rescue

I started my day with this headline from The New York Times: "Private Equity Firms Look to Take Over Banks." Reading it put me in a mind to share a parable, which you may recall from your childhood. In this tale, a fox and a scorpion reach a riverbank; both are intent on getting to the other side. As the fox prepares to enter the water, the scorpion asks to ride on the fox's back, provoking the incredulous mammal to observe that the scorpion would surely be tempted to sting him during the crossing. The scorpion replies that since such an action would produce their mutual destruction, he would restrain his natural inclination. As the story goes, the fox is persuaded and allows the scorpion to clamber onto his back. Just as the two reach the middle of the river, the scorpion strikes and the fox, in his death throws asks, "Why did you do this?" to which the scorpion replies, "It's just in my nature."

So when firms like J.C. Flowers and Company and Carlyle Group deploy their heaviest industry hitters to sweet talk Secretary Geithner, I begin to worry. These firms would like the Treasury Secretary to, "...pressure the Fed to back down," and allows private equity firms to buy banks. They claim it's sensible in light of the country's economic duress and their ability to tap $400 billion in capital. If only those depression era laws preventing such ownership could be lifted - or go unenforced - then all would be right with the world, or so they argue. That's exactly the sort of logic that the scorpion always offers the fox before striking.

I am not one of those people who believe that the government always knows what's best or that more regulation is automatically the right answer. Very often, the government makes a hash of things, and its policies have unintended (bad) results. The same logic, of course, applies to profit seeking firms. They're best intentions have a way of going awry, and when such an outcome threatens national economic security, we should all pay close attention.

Being private doesn't always assure the best outcome. Having cash doesn't necessarily mean that you will work to promote a long-term, stable economic system. Repealing laws created precisely to forestall another depression doesn't make any sense. Let's learns something from the experience of the fox and ignore the advice of the scorpions, no matter how good their intentions may be.

Comments

[jhNY]

01:48 PM on 05/06/2009

The Carlyle Group? Where have I heard that name before? Dunno. Well, anyway, all those crackpots who dream up ridiculous plots in which shadowy investment cabals secretly manipulate economic and political events to their own profit will have nothing to work with here...

[Leakman]

12:29 PM on 05/06/2009

Are all you people out there brain dead. No one is even paying any attention to Senator Durbin's statement that Congress is owned and governed by these banks. Now private equity firms want us to let them buy the banks that are insolvent unless you count the money the government put into them. We don't have a democracy but a kleptocracy.

[Michael B. Laskoff]

12:51 PM on 05/06/2009

Leakman: No need to be so dark and jaded. Here, The New York Times, did the jobs that newspapers used to do. They skipped a PR event and conducted some investigative journalism. Often, when that happens, bad things are moderated or avoided. This is just the sort of article to get a whole lot of people in a fit of agitation. Thus, I hope that we hear more of this sort of thing, not less.