Saturday, July 26, 2008

PEU's Want to Save Banks While Profiting Handsomely

"The flavor of the day is buying your own debt at below face value. I'm buying bank debt in my deal with leverage from the bank that made me that deal"--David Rubenstein in Forbes, May 2008

Not only is the co-founder of private equity underwriter (PEU), The Carlyle Group, buying back bank debt on the cheap, the magnanimous leader wants his firm to save those same struggling banks. Two Carlyle employees, Olivier Sarkozy and Randall Quarles, wrote an op-ed for the Wall Street Journal recommending private equity come to the rescue of failing banks. (Olivier is the step brother of French President Nicholas Sarkozy, who's concerned about "injecting more ethics into financial capitalism," at least that's what he told Barack Obama. Randall Quarles is an ex-high up in the Treasury Department.)

Leverage, $30 of debt per $1 of equity, is what sent Carlyle Capital Corporation crashing down just months ago. It's what contributed to the current credit crisis. Individuals and corporations borrowed at rates, their ability to pay predicated on the economic balloon's continued expansion. When the helium stopped flowing, much "credit owed" became "credit defaulted."

As David Rubenstein flies in to pick over the carcass of his own PEU's debt, he dangles the hope of bank rescue from Carlyle's deep pockets and the overflowing coffers of partner sovereign wealth funds. The price of a PEU bailout is decreased bank regulation, federally guaranteed debt repayment, and/or huge ownership chunks of the rescued institution.

Carlyle doesn't work for free and fellow co-founder William Conway "doesn't like a level playing field." It's the big boys game and clearly stacked in their favor. How many individuals are offered the chance to buy back their mortgage on the cheap?