Wednesday, July 15, 2009

PEU's Say They Pose No Systemic Risk

A spokesman for the Private Equity Council stated:

Private equity contains none of these systemic risk factors and thus should pose little concern for policy makers seeking to develop a new regime to guard against catastrophic, cascading financial shocks.

None of the systemic risk factors? What about capital calls? Bloomberg reported:

Washington, D.C.-based Carlyle Group, the world’s second-largest private-equity firm, made $681.3 million of capital calls on the pension fund (CalPERS) in 2008.

What if CalPERS said no and asked for their funds back? It could spark a privte equity underwriter (PEU) run.

Are there other risky practices, other than paying premium prices in highly leveraging deals? Tulsa World reported:

Carlyle Group affiliate SemGroup lost $2.4 billion in margin calls on oil futures trades and had its credit line pulled by Bank of America.
Margin calls on energy futures trades? Who knew? Very few according to SEC documents.

Don't forget their ability to lose Michael Huffington's $20 million investment in Carlyle Capital Corporation in a year. Carlyle affiliate Hawaiian Telecom's bonds went from 102.75 to 0.5 cents on the dollar when it declared bankruptcy. Did another fund buy credit default swaps on HT bonds to soften the blow? Is that trading on insider information?

What might spark a PEU run? It would be non-systemic risk factors, according to the Private Equity Council.

Goldman Sachs will take discounted private equity stakes off investor's hands. Goldman started a $5.5 billion fund to acquire PEU investments on the cheap.

With all the political capital amassed by Carlyle, Goldman and company, I smell a regulatory free pass.

Update 2-11-12:  Carlyle's Boston Private Financial Holdings received $154 million in TARP funds, which they used to provide credit to "high net worth" individuals.  .

Update 4-1-12: Regulators warned banks about "covenant lite" junk bonds, heavily used by PEU's.  They're back and contributing to PEU systemic risk..