Buyout Blunders or Distressed Dandies?

With more stringent FDIC regulations taking hold, buyout shops such as Moelis and Carlyle have taken to purchasing small banks ($1 billion AUM) in hopes of using them as vehicles for purchases of other distressed lenders. Tighter regulations have led the Federal Deposit Insurance Corporation to award just 2 out 83 of this year's failed lenders to private equity type funds. The remainder were sold to banks already having charters and track records.

Private equity firms face the risk of having to return around $500 billion in unused capital to investors and potentially forgo the fees they charge for management and sale of assets. As a result, some are scrambling, looking to make deals which they may never have even looked at in the past.

I see two potential scenarios:

1) These guys are walking into a mine field. Their greed and frustration is leading them to buy assets outside of their normal risk profile. Some of these banks, still have a lot of mortgage related debt on their books and nobody knows how the housing market situation will play out over the short term. As a result they are taking money in hand and putting themselves in the same sort of position TPG got into when investing in WAMU. They do not know what they are doing.

2) This is a great idea. "The Wilbur Ross theorem", get yourself a "buyout vehicle" and puppeteer your way to profits. Keep good management, dump the bad, bring in your own hand picked few and you're set. Simply side stepping the eternally one-step behind the game feds and their regulations to create a synthetic buyout. They know exactly what they are doing, cab and truck depots have done it for decades.

All I can say for sure is that when the housing crisis started, I thought that distressed asset investing would be a lot easier ( and hotter ) than it has been with respect to failed or in danger banks.

What do you guys think?