Jason Ader, a former hot-shot casino industry analyst turned wealthy hedge fund manager, is rolling the dice, hoping to become a community banker in Las Vegas.

But federal bank regulators haven't seemed very inclined to grant him his wish. And their reluctance underlines an unusual conundrum at the center of the U.S. financial system today.

Hundreds of small banks across the country are struggling to keep their doors open, but the industry's overseers in Washington, D.C. are more wary than ever about the breed of high-rollers that inhabit Wall Street, who come bearing bags of cash and the promise of an easy fix.

The fear is that financiers like Ader are looking to make a killing off of distressed community banks. But he and other new bankers are determined to show regulators that they have them all wrong. To hear Ader tell it, he simply wants to help.

Still, the standoff continues.

Seven months ago, Western Liberty Bancorp , a publicly-traded shell company managed by Ader, submitted applications to the Federal Reserve of San Francisco and the Federal Deposit Insurance Corp to acquire Service 1st Bank of Nevada, a small community bank in Las Vegas with just $210 million in assets. The applications to approve the deal, which the companies first announced last September, are still pending.

The approval process has dragged on so long that Western Liberty upped the amount of new capital it plans to sink into the four-year-old bank from $15 million to $25 million. Shares of New York-based Western Liberty recently were bounced from the NYSE Amex Stock Exchange, after the company with $86 million in cash but no active operations to speak of, failed to meet the exchange's minimum listing requirements.

The 42-year-old Ader, who sits on the board of the Las Vegas Sands resort and casino company, hasn't given up on his wager that he can turn Service 1st, which operates a single branch located just minutes from the Vegas Strip, into a local commercial lender for the gaming industry. A married father of four children and a fixture in the Hamptons, Long Island social scene, Ader is confident the deal will eventually get done.

Our goal in this transaction is to strengthen an existing Nevada community bank, while generally infusing more capital into the Nevada banking system and local economy, Ader said in a recent interview at the midtown New York offices of Hayground Cove Asset Management, the $550 million hedge fund that he also manages. Our plan is to relist (the shares) after the deal is completed and approved. The NYSE has told us they want us to relist.

Ader's this-will-help-the-economy sales pitch may be his best bargaining chip with regulators. And it's something they are hearing more and more these days from money managers itching to break into the banking business.

To some degree, it's a strategy born of necessity. While regulators remain wary of Wall Street's new bankers, they recognize the pressing need for community banks to raise billions in new capital to avoid shuttering up.

FEAR OF EASY MONEY

The stalemate comes as a surprise to some. At the outset of the financial crisis the conventional wisdom was that private equity firms and hedge funds would emerge as the main buyers at government auctions of banks seized by regulators.

The experts said private investors would trip over one another for the right to buy a failed bank. After all, the deals still look like easy money -- all upside if the economy recovers and little downside risk because the FDIC often agrees to share in the losses and keep some of the worst assets.

But to date, fewer than two dozen of the more than 236 banks shut by the FDIC since January 2009 have been sold at auction to investment groups sponsored by private equity firms, hedge funds and wealthy financiers. A handful of investor-backed groups have bought bank-owned real estate taken on by the FDIC. Maybe the most successful private deal so far was the FDIC's March 2009 sale of IndyMac to a group led by a bunch of hedge funds and private equity firms.

Even investment vehicles officially sanctioned by bank regulators to do deals with the FDIC have largely remained on the sidelines.

SJB National Bank, a $1 billion acquisition company led by billionaire investor and real estate developer Stephen Ross, has yet to ink a deal for a failed bank.

Also still in standby mode is an investment vehicle called Stone Bank, in which private equity giant Blackstone Group Inc is a major partner. Led by Brad Oates, the former president of Bluebonnet Savings Bank, a defunct Dallas thrift, the Texas-based investment company is waiting final regulatory approval to begin hunting for a struggling or failed bank to buy.

Then there is distressed investment shop Lone Star Funds. Last summer it opened an office in Washington, D.C., to be closer to regulators as the firm acquired failed banks, but it has yet to complete a single transaction.

Some of the lack of activity is no doubt the result of financiers reassessing their options after the FDIC adopted new rules last summer. One of them requires investment groups looking to buy failed banks to pony up more capital than more traditional financial buyers like TD Bank and US Bancorp . Another forces them to hold on to their bounty for at least three years before cashing out. The more stringent terms have led some private investors to conclude that regulators have made it too difficult to make a quick buck off an investment in a failed bank.

To be fair, regulators have long preferred doing business with either an existing bank, or a management team with a proven record of success in running a financial institution. But in the wake of the financial crisis they are more cautious than ever that some money managers and financiers -- many of whom are unfamiliar faces in the world of community banking -- are simply looking to snap up struggling lenders on the cheap but have no long-term commitment to lending to businesses and consumers.

NOT ONE OF US

Right or wrong, a money manager like Ader raises some eyebrows for bank regulators, said people familiar with the process of getting banking deals approved. Before going out and starting his Hayground Cove hedge fund in 2003, Ader became a minor celebrity when the gossip pages romantically linked him to the actress Tara Reid, back when he was single and still a star analyst at Bear Stearns.

A skinny and boyish looking money manager, Ader is someone who has never before shown much interest in banking -- and that's what makes regulators so hesitant. Up until now, his main trade has been casinos, hotels and restaurants.

In fact, Western Liberty, which used to be called Global Consumer Acquisition Company, was set up by Ader as a so-called blank check company to buy a consumer-related business. In a November 2007 initial public offering, Global Consumer Acquisition raised nearly $300 million, most of it from other hedge fund investors.

Ader only settled on the idea of doing a bank deal after failing to find a consumer company to acquire. An earlier bid to buy another small bank in Nevada collapsed just months after the transaction was announced.

Since the 1st Service deal was announced, Ader has taken some steps to make the transaction more palatable to regulators. He rebranded the company and restructured it by allowing all those investors not committed to doing a bank deal to walk away and redeem their money. Many did, taking out some $200 million in cash. He also agreed to keep on much of Service 1st's management team to run the bank, which has a former Nevada governor and casino industry executives on its board, after the merger.

Hayground Cove's once substantial equity stake in Western Liberty was converted into 8.5 million warrants, which can only be exercised if the stock hits $12.50. Right now, Western Liberty's shares trade for half that price on the Over-the-Counter Bulletin Board.

Will these steps be enough to persuade regulators that Ader is a serious banking player and not out to simply salvage something for his Hayground Cove investors and other hedge funds still holding an equity stake in Western Liberty? The odds aren't great.

Carpet bagger bankers are not what the regulators or local communities want to see, said Ken Thomas, a Miami-based independent bank consultant and economist. Hedge funds and private equity firms may have big wallets but they don't necessarily have big hearts.

TAKE A CHANCE ON US

Still, the financial firms are as thick-skinned as they are deep-pocketed. And they are determined to win over regulators and show that they can be more like George Bailey than Henry Potter -- the hero and villain of the classic Frank Capra movie It's a Wonderful Life about a small town savings and loan company.

One way is to prove themselves to be helpful. In May, Carlyle Group, the Washington, D.C.-based private equity firm, was the lead investor in a $235 million capital raise by Hampton Roads Bankshares , a troubled mid-Atlantic lender with $2.2 billion in assets. Warburg Pincus and TH Lee Partners are committing about $270 million to the recapitalization of Sterling Financial . The capital raise will give the two private equity firms a combined 40 percent ownership stake in the Spokane, Washington-based bank.

Private investors are hoping that regulators will look more kindly on financial transactions designed to prevent a capital-starved bank from becoming a failed bank. They also believe that government officials may even come to like them better after these recapitalizations, making them more likely to approve their bids for failed banks.

Familiarity and trust are important commodities in any business relationship and particularly so in the regulatory arena, said Thomas Vartanian, a bank regulatory attorney with Dechert in Washington, who has advised a private investment group involved in buying some failed banks from the FDIC. There is still a lot of discussion that needs to happen between regulators and the private equity side. It is an important part of the process.

One thing private equity shops and hedge funds are doing to speed along the getting-to-know-you process is teaming up with former bankers well known to regulators. The private equity firms are hoping that with these ex-bankers serving as the front men for acquisition vehicles and managers-in-waiting, it will be easier to get regulatory approval for proposed deals.

A group of former Bank of America executives, for instance, are at the helm of North American Financial Holdings, a Charlotte-based company that has raised about $1 billion from investors including private equity firm Crestview Partners. Led by former BofA vice chairman Gene Taylor, North American Financial came together to buy failed banks from the FDIC. But North American Financial's first deal was to invest $175 million in Florida's TIB Financial , a deal that gave the new bank acquisition company a 99 percent ownership stake in the Naples, Florida-based lender.

In an interview soon after the TIB deal, Christopher Marshall, North American Financial's chief financial officer, said the company had not given up on buying failed banks in its quest to cobble together a high-performing regional bank. And sure enough, on July 16, the FDIC announced that it was selling three small banks it had closed in Florida and South Carolina to North American Financial.

Another way private investors are trying to smooth out some of their rough edges, in the eyes of top bank regulators at least, is by getting face time with them.

The public portion of FDIC Chairman Sheila Bair's official datebook for the past several months, for instance, is peppered with meetings she has had with private investors and their legal and financial advisers. Some of the financiers looking to buy banks who trekked down to Washington to meet with Bair have included WL Ross & Co's Wilbur Ross, Lightyear Capital's Donald Marron, Blue Ridge Holdings chairman Milton Jones and National Bank Holdings' Lawrence Fish.

It's not publicly known what was discussed at any of these private audiences. But soon after many private investors began to shift their focus to recapitalizations and away from simply putting all their effort into buying failed banks.

BETTING ON A REBOUND

For their part, the regulators aren't discouraging the course change.

FDIC is pleased that investors are investing in open banks -- that's a win-win for everyone, said Michael Krimminger, a top policy advisor to Bair of the FDIC.

One thing is certain: there are plenty of banks in the United States for private equity firms and hedge funds to target. By its own count, the FDIC's confidential list of problem institutions contains the names of 775 banks with $431 billion in assets.

But it's an open question whether private investors looking to sink money into a struggling bank can expect to make the same kind of return on their investments as they might have made from the acquisition of a failed bank.

The downside of an unassisted bank deal is that the buyer has all of the credit risk and no loss sharing, said Kevin Stein, an FBR Capital Markets investment banker, who is advising a number of investment groups looking to acquire troubled banks.

Wilbur Ross, whose private equity firm recently bought a 25 percent stake in New Jersey-based Sun Bancorp , said consolidation in the banking industry is inevitable and he wants to be a player in the market. But Ross cautioned that putting money into small banks is no way to get rich quick.

Regional banks are not ideal candidates for quick-gain oriented speculators, said Ross, a financier who built his fortune by targeting beaten-up businesses waiting for a rebound.

And of course timing is everything for private investors. In doing their recapitalization deals, they are betting the worst is over for small banks and that they will see a rebound, much like their bigger bank siblings -- JPMorgan Chase , Bank of America and Goldman Sachs Group . Private investors are mindful of the $1.3 billion private equity giant TPG lost on its capital infusion into Washington Mutual, which was seized by regulators about five months after the money was committed.

Then again, the WaMu loss didn't scare away TPG. Last year it signed up for a bank acquisition vehicle put together by Starwood Capital Group's Barry Sternlicht along with Corsair Capital and Perry Capital.

From an investment perspective, some bank industry analysts said one of the best bank deals to emerge from the crisis is one in which a wealthy investor group acquired the remnants of IndyMac, a giant failed lender that regulators shuttered in 2008. In March 2009, the FDIC sold some $20 billion of IndyMac's assets and $6.4 billion in customer deposits to OneWest Bank, a new bank formed by the investors, for about $13.9 billion.

The owners of OneWest reads like a Who's Who of finance and industry and includes George Soros, Dell Inc founder Michael Dell, Dune Capital hedge fund manager Steven Mnuchin, private equity firm JC Flowers & Co and hedge fund giant Paulson & Co.

Critics have claimed the OneWest group got a sweet deal because it was able to leave the FDIC with some $4 billion in assets it didn't want and got regulators to agree to a loss-share arrangement. The closure of IndyMac cost the FDIC's insurance fund about $11 billion.

OneWest is proving to be a remarkable turnaround story, especially for its wealthy investors. The newly-formed bank, according to a regulatory filing with the Office of Thrift Supervision, has generated $2.2 billion in retained earnings as of March 31. In the fourth quarter of 2008, its final full quarter under FDIC control, the old IndyMac lost $2.6 billion.

It's the kind of success story that makes Jason Ader and other Wall Street big shots green with envy and willing to take a chance on small banks everywhere.

(Reported by Matthew Goldstein with additional reporting by Damon Hodge in Las Vegas; editing by Jim Impoco and Claudia Parsons)

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