Recently, the Financial Times observed that U.S. banking regulators were allowing greater access to commercial bank assets by private equity firms as a sort of last desperate act to restore banking activity in distressed areas.

US financial regulators are drawing up new rules to facilitate private equity acquisitions of troubled banks in an effort to unlock tens of billions of dollars that could be deployed to recapitalise ailing lenders.

People close to the situation said the plan, which has yet to be finalised and could still change, might require private equity companies to inject substantial capital into troubled lenders and agree not to sell them for at least two years.

Indeed, since earlier this year, apparently, the FDIC has been selling banks they’ve closed to these companies despite the reputation of these firms.

For those unaware, last week Florida-based BankUnited was seized and sold by the FDIC to a group of private equity investors, marking one of the biggest bank failures of the year. However, the Federal Reserve said that after Michigan-based Flagstar Bank was sold to a private equity-firm earlier this year, it wouldn’t sign off on any more similar deals.

The FDIC among other agencies is apparently responding to Senate Banking Committee member, Jack Reed, Democrat from Rhode Island, who called

…for the FDIC to come up with a set of guidelines for private equity firms that want to buy banks. Although the FDIC has already promised to provide “policy guidance” for such deals, the fact that Reed, who has been charged with overseeing Wall Street, has expressed interest may accelerate the process.

Reed said, in a statement to Bloomberg, basically that firms have been hopping around shopping overly risky activity until they can get a regulator to allow it. Senator Reed told Bloomberg that a new set of rules could put an end to that as currently there’s little to no coordination between regulators.

Apparently, one of Reed’s requirements is transparency. "In a recent letter to U.S. Treasury Secretary Timothy F. Geithner, [Reed] expressed ’serious concerns’ about this potential problem, stating that"

“private equity firms are not transparent. There are potential conflicts with their other holdings, investors, management and sources of funding, much of which is not disclosed.”

Fat chance he’ll get that. Meanwhile, private equity firms have been running end-arounds to latch on to bank demand deposits, using something called "regulatory arbitrage" or "regulatory shopping."

The financial Barbarians are at the gates of the U.S. banking sector.

“Regulatory arbitrage” – sometimes called “regulatory shopping” – has emerged as the favorite strategy for these Barbarians, otherwise known as private equity firms, to get around the federal rules that kept them from owning banks.

Why the sudden interest in banks? Like legendary bank robber Willie Sutton is famously (and probably falsely) remembered for saying: “That’s where the money is.”

Like so many of the businesses in the financial sector, the private equity business is right now reeling – and littered with its own bankrupt leveraged buyout deals. So now these LBO firms are shrewdly targeting failed banks, playing regulatory arbitrage, and shopping around as they search for ways around the regulations that were designed to keep companies with their motives out of the U.S. banking industry’s venerable vaults.

Go to the article linked immediately above to find more out about the strategies used and the players involved (the usual suspects, including Cerberus). What will come of this new phase in banking deregulation?

Allowing private equity players to replicate the failures of their recent history and leverage going concerns with layers of debt by now granting them access to FDIC-insured depositor funds to do more of the same is a mistake of massive proportions…

Desperate times don’t always require desperate measures. While it’s true that banks need to be recapitalized and that private-equity firms have plenty of dry powder at the ready, we should welcome banking-sector investments from these private-equity players only if it’s passive in nature. After all, why should we give the quick brown financial fox access to our already-plucked-to-death hen house?

This development is so counter-intuitive, it boggles the mind.