Sunday, September 21, 2008

More Disaster Capitalism for PEU's?

It turns out Wall Street, with all its financial innovation the last eight years, is in need of a government bailout. Our free market President's latest rescue plan fits into the new maxim:

"Privatize the profits, socialize the losses"

Yet, who stands to win in the $1.5 to $2 trillion taxpayer sponsored rescue of "mortgage related securities"? First, pension funds will take less of a hit. Last fall, their losses were estimated at $1 trillion. Second, America's worldwide creditors including central banks and sovereign wealth funds will be able to offload their mortgage related securities onto Uncle Sam. Third, domestic banks and financial institutions can move their billions in financial dog food.

How do you feel about bailing out foreign investment companies already fat from our gas money? At a time when I want help with health insurance coverage, I'm not excited about helping Wall Street insure their financial health by covering their bad products.

Bush is effectively nationalizing a segment of financial products and taking on their product liability. That is if it's truly limited to mortgage related securities? It makes some sense to buy real asset backed securities, but not credit derivatives, like credit default swaps. I'd like to see a definition of the term "mortgage related securities" and a list of the range of products Uncle Sam will buy back.

Who will buy the products at a later date? How about the corporate issuers of the debt? Not long ago. Carlyle Group co-founder David Rubenstein bragged about buying back their debt on the cheap.

"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

What if David could buy it back even cheaper from Uncle Sam? Now that would help any greedy private equity underwriter. The Carlyle Group purchased ManorCare, the huge nursing home company in late 2007. They floated $4.6 billion in debt via a commercial mortgage backed security facility.

Disaster capitalism could benefit firm's like Carlyle. William Conway, another co-founder of the politically connected PEU, hates a level playing field. Did it just tilt more in their favor? If they become their own debt holder for pennies on the dollar, while maintaining high interest deductions, they could really ride Uncle Sam.