(By Shah Gilani) 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.

The new twist on acquisition leverage is to have taxpayers, through the Federal Deposit Insurance Corp. (FDIC), backstop losses on acquired banks if the economy continues to falter.  And as soon as they can leverage depositors and the FDIC as a source of funds, these private equity firms will go back to buying leveraged-up targeted companies with cheap borrowed money – to which they’ll have easy access, since they’ll actually own the banks.

The Background on Banking Regs

Banks are regulated at the federal level by a number of agencies. The regulators include the Federal Reserve Board (FRB), which oversees national banks chartered by the government, the Office of Thrift Supervision (OTS), a U.S. Treasury Department office that oversees thrift institutions, savings and loans and credit unions, the Office of the Comptroller of the Currency (OCC), and the FDIC, not to mention various state banking regulatory bodies.

Lately, approval actions by the OTS and FDIC are at odds with the U.S. Federal Reserve, which has not authorized the acquisition of controlling interests in any banks by any private equity players. The FDIC has expressed its acquiescence as a way of more-quickly offloading insolvent banks in the hope that doing so might help limit its exposure to depositor claims. And the OTS, after being somewhat hesitant – and with its future as a regulator now in jeopardy – seems to be doing what it can while it still has the power to grease the wheels for private equity interests.

For a case in point, consider billionaire investor Wilbur L. Ross Jr., an expert purchaser of so-called “distressed” assets who is known by some as “The King of Bankruptcy.”

Using his recently acquired American Home Mortgage Servicing Inc. – one of the nation’s largest mortgage servicing companies, with about $100 billion on its books – as his investment vehicle, Ross sought to buy bankrupt American Home Bank – at one time a would-be Countrywide Financial Corp. emulator.

The OTS denied the sale on the grounds that Ross’ firm wasn’t already a bank, and AHB was subsequently sold to The Bancorp Inc. (Nasdaq: TBBK), a federally chartered online bank based in Wilmington.