(Update 1)

Distressed asset investor Wilbur Ross, of WL Ross & Co., wants to be a banker. But buying troubled banks like Florida’s BankUnited Financial Corp. (BKUNA) just doesn’t really fit his ‘good bank’ plan.

This week, the Financial Times reported that Ross was running due diligence on the $14 billion bank, and about to make a bid with fellow private equity firm The Carlyle Group. But sources familiar with the transaction said Ross walked away from the potential deal, likely leaving the government to the task of cleaning up any bad assets at the bank directly.

According to regulatory filings, 60 percent of BankUnited’s $12 billion loan portfolio is in the form of toxic option ARMs; two-thirds of the bank’s deposits are in the form of CDs, as well, leaving only $2.5 billion in the natural deposits investors like Ross see as truly valuable.

Ross said he would not comment directly on any deals his firm does until they’re signed and delivered. BankUnited spokeswoman Melissa Gracey did not immediately return a call seeking comment.

Ross has made billions investing on the cheap in troubled companies that no one else wants. This time, however, rather than wheeling and dealing with industry titans, he appears to be looking to the Obama administration to make new rules that can help turnaround specialists like himself build a good bank from the pieces of broken banks. Given that his American Home Mortgage Servicing, Inc. platform is performing nicely as the nation’s largest independent servicer and just got upgraded two notches by Fitch Ratings, as well, Ross’ investment firm isn’t in bad shape or desperately seeking deposits.

“He has the time to pick through the FDIC’s litter of smaller failing banks and buy the best ones,” a source familiar with the situation said.

For his part, Ross told HW, “The future of banking will look like the old-fashioned banks like Hudson City Savings Bank in New Jersey where I grew up. The days of high-flying, go-go banks are gone and should have never happened.”

It’s not like Ross is looking for a hand out from the Treasury’s trillion-dollar piggy bank, akin to the billions Citigroup, Inc. (C) or Bank of America Corp. (BAC) were given to keep their operations alive. In fact, he’s already plopped down $7 million of his own money last month to take a majority position in a small Florida-based bank, First Bank and Trust of Indiantown. The community bank, which holds only $83.5 million in assets and according to sources inside its regulator is ranked is as healthy, paved the way for Ross to pick up a bank charter. It’s a move that some say the FDIC, who sits in the power seat to dole out the best deals to investment firms like Ross’ own, likes to see.

Now that he holds his ‘license to be banker,’ Ross isn’t being shy about what he wants to see from administration officials. “We really need the regulators give us time to do due diligence on these failed banks and comb through their assets bucket by bucket to get our own view on where the value is,” he said in an interview.

Ross said he picked up his stake in the Florida-based bank, housed near his Palm Beach home, when a friend’s husband passed away, and not because it was troubled bank. He said it was good fit because he knew the local real estate market on the loans the bank holds. He also liked the fact that its vault is packed with natural deposits from wealth within the community — and not so-called “fast money” CDs, or out of state brokered deposits that are often seen as quick to withdraw.

The government’s cost of capital is the cheapest out there. So Ross and his fellow private equity friends, who can’t get cheap billion dollar financing like they did last few years from investment banks, simply wants to go direct to the government coffers to pick up the lowest interest rates – and they also expect plenty of time to pay it back, too. Enough time, at least, to turn a lackluster bank into one that behaves like a profit center, so they can sell it for a profit when the market rebounds.

“If Treasury wanted, they could open up their federal assistance programs, like TALF, to fund the private sector buying their troubled banks. I need to see a low cost of leverage on the transaction,” said Ross.

Last week, Ross’ firm spent $1.5B to buy a good chunk of Citigroup’s servicing business, but did not buy any of the underlying $37 billion in Alt-A and subprime loans. Ross suggested to HW that at some point he will look to buy whole loans and house them in a new ‘good bank,’ but not until “cheap leverage” is there for the taking. He also said he needs at least a month to make sure the servicing piece he just bought integrates well with his existing team at AHMSI, so things don’t get out of control.

“There are plenty of smaller community banks in Florida, Arizona, Nevada who have built excellent core deposit bases,” Ross said. “But their exposure to construction loans for residential housing projects and commercial real estate in deals like strip malls will subject them to losses and [a need for] federal assistance. That’s what we’re looking to buy.”

And to motivate Ross — and other investors like him — to take any of the hundreds of small community banks the FDIC has suggested they expect to fail off of their hands, he expects them to wash most of the toxic assets off of their balance sheets before they offer him a chance to invest.

“The share of losses the government took on in the sale of IndyMac to private equity investors last month really set a precedent,” he said. “We need to see more reasonable risk sharing formulas like that to make it a worthwhile investment.”

“Why would these guys pay full price, when the government will remove the stuff you don’t want for free and share future losses, too?” said Mark Hanson, a mortgage analyst with The Field Check Group.

In a New York Post story this week, Ross offered glowing praise to the new Democratic administration for understanding that they are going to need the private sector to help them clean up their banking mess. “Let us hope that when the details are finally released they are equally logical,” he opined. But he also has warned in recent television interviews that investors won’t begin buying toxic mortgages until banks reduce their marks on them.

So long as logical means profitable for private investment firms like Ross’ own, however, the Feds may have found a much-needed friend to start digging a newly-minted Financial Stability Plan out of its trillion-dollar hole.

Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business and Trader Monthly. Contact her at [email protected].