The Shock Doctrine

Next Frontier of Disaster Capitalism: Private Equity Firms Controlling Banks?

Eric Lipton, New York Times, May 6, 2009

"For all the talk of the banking crisis, Mr. Flowers and other giant private equity players are circling distressed banks around the country, competing to buy into the industry.....They and other investors see banks as the recession’s biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale....

"To push their case at the White House, the Treasury and the Fed, Mr. Flowers and others in his industry have enlisted an all-star cast of advisers, lobbyists and lawyers. They include H. Rodgin Cohen, chairman of the Sullivan & Cromwell law firm and Wall Street éminence grise, and Randal K. Quarles, a managing director of the Carlyle Group and a Treasury under secretary in the administration of President George W. Bush. Part of their strategy, Mr. Flowers said, is to persuade the Treasury secretary, Timothy F. Geithner, to pressure the Fed to back down.

"The private equity firms are pitching to regulators a way to let them take control of banks while respecting banking traditions. Essentially, they would separate the entities — they call them silos — that buy the banks, walling off their other private equity investments from any newly created bank holding company. Fed officials will not speak about banks for the record, but they have told the firms that they view the silo concept as little more than a subterfuge....

"Mr. Flowers, in an interview, said he was confident he would prevail. Even if he cannot make the Fed reverse its policy, he will consider it a victory if the Fed approves an individual deal. He has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. 'I find it to be an extraordinary time to invest,' he said. He was even more blunt when he spoke to an industry group in New York earlier this year. 'Lowlife grave dancers like me will make a fortune,' he predicted."