Are policymakers making the same mistakes we observed in the early days of the S&L crisis? Late Monday, the Federal Reserve revised key rules surrounding bank holding companies, loosening ownership restrictions to allow private equity firms to take a larger chunk of banks. In particular, the Fed said it will allow private equity investors to take at least one seat on the board of directors at bank holding companies — and, in certain cases, two. Private equity firms also will be allowed to take up to a 15 percent voting interest and 33 percent economic interest in bank holding companies, up from previous ceilings of 9.99 percent and 25 percent previously. The Fed was careful to position the changes as incremental and an update to assumptions underlying the Bank Holding Company Act, and said it “will continue to monitor carefully minority investments in banking organizations to ensure that investors do not, in fact, exercise a controlling influence over the management or policies of the banking organizations in which they invest.” Read the full Fed statement. But HW’s sources said that any significant investment into a bank, especially of the magnitude under discussion by the Fed in the case, means that the investors will gain strong influence over at least some operations of a particular bank. “It’s a farce to suggest that a private equity investor coming in with a 33 percent stake is going to so passively, especially when we’re talking about banks in this environment,” said one source, a 20-year veteran of the capital markets. “This is simply trying to cater to one of the few spaces that still has dollars to invest, since everything else has pretty much dried up. And they may not control all operations, but they can certainly put pressure on specific lending decisions.” Another source, an ABS/MBS analyst, suggested that the Fed’s changes harkened back to policymakers’ missteps in the early days of the Savings & Loan crisis. “Next up, if this plays out the way it’s shaping up, will be changes or exceptions to accounting standards,” said the source, who asked not to be named in this story. Indeed, a case-study on the S&L crisis published by Bancware eRisk notes the following: “In the early 1980s, the now-defunct Federal Home Loan Bank Board jettisoned many regulations concerning S&L ownership, so that individuals and small powerful groups of shareholders could more easily gain control of institutions.” Others scoffed at the suggestion that the Fed’s move was a misstep, and said that easing investment rules would help already-in stakeholders provide additional liquidity. “There aren’t a ton of investors willing to throw money at a banks right now,” said one source, a fund manager who asked not to be named. “The best sources of liquidity may in fact be existing investors who have more to lose.” Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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