Saturday, August 29, 2009

Corporate Boards: The Web for the Government-Industrial Monstrosity

Corporate boards approve an annual budget, which includes lobbying fees and political strategy. Board members donate money, time and expertise to further the firm's interest. For that, they are paid handsomely. Not terribly long ago, Senators wouldn't accept donations from corporations. They considered it a conflict of interest, as they were making decisions involving those very firms.

President Dwight Eisenhower warned of the Military-Industrial Complex. Today's steroid fueled version, encompasses much more than the armed forces. The Government-Industrial Monstrosity (GIM) infects nearly every sector of the U.S. While it is the elephant in the room, it badly wishes to remain invisible. Consider the case of Union Pacific, the huge railroad and shipping company. Large shareholders proposed greater political disclosure in April 2009:

As long-term shareholders of Union Pacific, we support transparency and accountability in corporate spending on political activities. These activities include direct and indirect political contributions to candidates, political parties or political organizations; independent expenditures; or electioneering communications on behalf of a federal, state or local candidate.

Disclosure is consistent with public policy, in the best interest of the company and its shareholders and critical for compliance with recent federal ethics legislation. Absent a system of accountability, company assets can be used for policy objectives that may be inimical to the long-term interests of and may pose risks to the company and its shareholders.

Union Pacific contributed at least $3.2 million in corporate funds since the 2002 election cycle.

However, relying on publicly available data does not provide a complete picture of the Company’s political expenditures. For example, the Company’s payments to trade associations used for political activities are undisclosed and unknown. In many cases, even management does not know how trade associations use their company’s money politically. The proposal asks the Company to disclose all of its political contributions, including payments to trade associations and other tax exempt organizations. This would bring our Company in line with a growing number of leading companies, including Pfizer, Aetna and American Electric Power that support political disclosure and accountability and present this information on their websites.

The Company’s Board and its shareholders need complete disclosure to be able to fully evaluate the political use of corporate assets. Thus, we urge your support for this critical governance reform.

How did the company respond?

The Board of Directors recommends a vote AGAINST this proposal.

Union Pacific spent $43.5 million on lobbying from 2003-2009. It reached a maximum of $9.8 million in 2006, the same year it added two politically high powered board members. July 2006 found Andy Card, President George W. Bush's Chief of Staff, with a seat at the table. One story stated:

Union Pacific elected former White House Chief of Staff Andrew Card to its board of directors, a move that added clout to the railroad's already impressive Washington connections but dismayed shippers who feel besieged by UP's market power.

After the midterm elections (when Democrats gained control of the House of Representatives), Union Pacific added Thomas F. "Mac" McLarty to the board ranks. McLarty was President Bill Clinton's Chief of Staff and is a Senior Adviser for The Carlyle Group.

Union Pacific created new board seats for Card and McLarty. Here's their 2008 board compensation:


They both control approximately 7,500 shares of stock. At $61 per share, that equates to over $450,000. Sweet! Three years of board pay and their stock holdings amount to $1 million, a windfall for most people, but chump change for the ex-President's Chiefs of Staff.

What was Union Pacific supporting the last six years that required bringing political insiders onto the board and paying tens of millions in lobbying fees? Did it want to set the stage for Mexico bypassing Western U.S. ports? Was it trying to outsource work to Mexico?

Their company description includes:

Union Pacific connects with Canada's rail systems and is the only railroad serving all six major gateways to Mexico, making it North America's premier rail franchise.
The big money boys hate a level playing field, using Uncle Sam to tilt it in their favor at every turn. Transparency and accountability? Hardly. Think of the windfall awaiting Rahm Emanuel.

Friday, August 28, 2009

Scully Gives Commercial for SHPS on C-SPAN

Tom Scully shared the stage on Washington Journal. At the end he declared he split his time between working for a New York investment firm and a D. C. based law firm, where the attorney works on "health policy." Here's what he didn't say:

1. Tom is a health care lobbyist for Alston & Bird. He lobbies for Aetna and the organized physician groups he plugged on C-SPAN, gastroenterologists, kidney doctors, and oncology physicians.

2. Scully is a private equity underwriter (PEU) with WCAS. As general partner he sits on a number of health care boards, including Solantic and Universal American. Solantic has CEO Rick Scott. The disgraced ex-Columbia/HCA CEO has a clear stake in health reform with his Center for Patients' Rights campaign.

3. Tom spoke eloquently of the benefits of Medicare Part C, also known as Medicare Advantage. WCAS owns Universal American, a Medicare Advantage insurer. In late 2008 Tom Scully had a 135,880 share interest in Universal American

4. Scully referred an Atlanta caller to SHPS for help figuring out her insurance options. C-SPAN allowed him a free commercial. Would he have plugged Viant, if WCAS hadn't sold it to The Carlyle Group?

Tom's a money changer, plain and simple. He should write C-SPAN a thank you note for his ample commercial time.

Wednesday, August 26, 2009

Who Owns Hawaiian Telecom Post Bankruptcy?

The Honolulu Advertiser reported:

Hawaiian Telcom plans to emerge from bankruptcy at the end of March under a reorganization plan that reduces its debt by nearly $800 million, the company said in a 333-page statement filed with the U.S. Bankruptcy Court Monday.

The article didn't state HT's owners at the end of March. The Carlyle Group shows Hawaiian Telecom as a current investment. The Honolulu article stated:

The company filed for bankruptcy protection Dec. 1 because of its heavy debt load and the loss of thousands of customers to wireless and other competitors.

The debt, which included $574.5 million in bank loans and about $500 million in bonds, helped finance Washington, D.C.-based The Carlyle Group's $1.6 billion takeover of the phone company in 2005.

Since Carlyle's takeover, Hawaiian Telcom has lost more than $200 million.

Who gets crammed down in the proceedings, loan, debt or equity holders? While not clear, the solution is to unwind the Carlyle deal.

Hawaiian Telcom's financial projections assume that the company's debt load will be sharply reduced, lowering its monthly interest payments.

Without that albatross, Hawaiian Telecom returns to profitability in 2011. If Carlyle keeps HT, they will have welched on 75 cents of every financing dollar.

To think the FDIC meets today to make it easier for private equity underwriters (PEU's) to buy struggling banks. Did you know the new rules will get a six month review?

(Update: Secured loan holders will own the company according to the Honolulu Star Bulletin)

Monday, August 24, 2009

Col. Gadhafi's Son Admits Corporate Ties to Freed Pan Am 103 Bomber

The TelegraphUK reported:

In a TV broadcast recorded on the plane, he (Saif Gadhafi) sparked a new row between Britain and Libya by claiming that the release of the Pan Am culprit had indeed been linked to lucrative business deals - despite Downing Street's insistence that it was purely a matter for the Scottish government.

"It is to be said for the first time, you were present on the table in all commercial, oil and gas agreements that we supervised in that period," he told Megrahi, as the pair sat together in the private jet's luxury lounge. "You were on the table in all British interests when it came to Libya, and I personally supervised this matter."

Saif Gadhafi knows how to handle Western government/business leaders. His father hired a D.C. lobbying firm to push Libyan interests on Capital Hill. The Carlyle Group hosted a star studded dinner in honor of Saif. James A. Baker, III and Frank Carlucci attended, according to a Libyan newspaper. The younger Gadhafi confirmed my suspicions. Will Senator John McCain tweet on Saif's revelation?

Sunday, August 23, 2009

UBS Squealer Gets Extra 10 Months

FT reported:

Bradley Birkenfeld, the former UBS private banker turned key informant, was on Friday sentenced to a tougher-than-expected 40 months in prison for helping wealthy American clients evade taxes.

The prison term is 10 months longer than was recommended by prosecutors, who said Mr Birkenfeld had provided “substantial assistance” to their tax evasion investigation involving UBS, Switzerland’s biggest bank.

U.S. District Court Judge William J. Zlock handed down the stiffer sentence. Does he not like whistle blowers? Who might Judge Zlock have been protecting?

Phil Gramm has been Vice Chair of UBS since 2002. A NYT article on his appointment said:

At Warburg, Mr. Gramm, 60, will be one of three vice chairmen and will report to John P. Costas, the chairman and chief executive.

The firm became aware of the tax evasion scheme in 2005. For years it did nothing to ameliorate the situation. What did Phil Gramm know and when did he know it? A nation of "whiners" awaits an answer to that lingering question.

Republican Phil Gramm was elected to the U.S. Senate in 1984. One of his first jobs was voting on the judgeship of William Zlock. His bio states Zlock was confirmed by the Senate on November 1, 1985.

Did the Zlock-Gramm history, however sketchy, play into the legal decision? Corporatists hate accountability, especially when a peon is delivering justice. There are lots of warnings in the legal world these days. It's getting harder to read the tea leaves, at least without a program describing links to the Red or Blue team.

Update: President Barack Obama played golf with the President of UBS Investment Bank/Chairman & CEO of UBS Group Americas during his Martha's Vineyard vacation.

(HT-Economic Policy Journal)

White Collar Rendition for Small Fry

The Obama administration renditioned Raymond Azar for bribing military purchasing employees. In a sting operation, Azar paid $106,000 in kickbacks to an Army Corps of Engineers official. His employer, Sima Salazar Group, is also under indictment,

An Army general stated the rough treatment should serve as a warning for other fraudulent contractors. Maybe, Mr. Azar didn't have enough money to buy special treatment.

Consider the cases of Chiquita Brands and The Carlyle Group/Riverstone Holdings. Chiquita Brands sponsored Colombian terrorists. It paid a $25 million fine. No rendition. No indictment.

Carlyle and its energy joint venture, Riverstone, paid a combined $50 million to make a pension bribery scandal go away. No rendition. No indictment.

Halliburton has a facilitating payments policy, i.e. the firm pays bribes to advance work in foreign countries. What practice wins out in a grease happy global economy? Who gets kid glove treatment when caught? The big money boys.

Small guys get fried, including the taxpayer. Azar and a CIA agent could've flown commercial. At what cost savings? Don't tell me the administration made the run to keep their renditioning skills sharp.

Friday, August 21, 2009

Saif Gadhafi: From Carlyle Group Dinner to Terrorist Plane

Col. Gadhafi's son Saif factored into two news stories. CNBC reported he escorted the Pam Am 103 bomber off his father's private jet to a hero's welcome. According to Reuters, Saif said:

"I also personally thank our friends in the British government as they have had an important role in reaching this happy conclusion," he said in a statement.

"I affirm that the Libyan people will not forget this brave stance from the governments of Britain and Scotland and that friendship between us will be enhanced forever. The page of the past has been turned and is now behind us," he added.

The crowd that greeted them at Tripoli's Mitiga airport, a former U.S. air base, were mostly members of Libya's National Youth Association which is close to Gaddafi's son.

In November 2008, Saif received a missive from President George W. Bush. The Carlyle Group hosted a dinner in his honor at the Washington Club. James A. Baker, III and Frank Carlucci attended according to a Libyan newspaper.

Who releases a convicted bomber after eight years of a century long sentence? Scotland did. Why? Mrs. Susan Cohen, a New Jersey woman, weighed in:

"I think it's appalling, disgusting and so sickening I can hardly find words to describe it," said Susan Cohen, of Cape May Court House, New Jersey, whose 20-year-old daughter, Theodora, died in the attack. "This isn't about compassionate release. This is part of give-Gadhafi-what-he-wants-so-we-can-have-the-oil."

CNBC said Libyan oil comes out the ground for the low cost of $1 per barrel. It seems the prisoner release and Western corporate expansion are connected.

CNBC Cheers Tax Havens

Michelle Caruso-Cabrera said on CNBC:

You may think this is about rich tax cheats, but no matter what your income is, your taxes are lower because of tax havens and they help prevent tyranny by corrupt governments.
Michelle is a cheerleader in the race to the lowest global common denominator for worker pay/benefits, taxes and regulation.

Health care reform is part of this race. Employers plan to shift health insurance responsibility to the worker. Just as retirement became primarily self-funded the last two decades, so too will health coverage.

Unions jockey to serve as a huge, health insurance purchaser for workers. They hope to become relevant again. If the choice is between an individual private policy and a union plan (at half the price), maybe workers will have an incentive to join.

Politicians, corporate executives and those perpetuating the myths (like Michelle) are exempted from this drive.

Carlyle Group Rushing to Yuan

Private equity underwriters (PEU's) rush to build yuan denominated funds. The list includes the Carlyle Group, Blackstone, KKR and Macquarie. WSJ reported:

The flurry of announcements reflects a sense of urgency among the foreign firms.
What does David Rubenstein know? Will China soon float the yuan? Is the dollar headed for an implosion? Will a new Fed chair impact the dollar's value? Are rich Chinese investors hesitant to invest in dollar denominations?

Only, the prescient Mr. Rubenstein can answer. Did it come from a private session with Tim Geithner or Larry Summers, maybe a dinner with Rahm Emanuel?

Thursday, August 20, 2009

PEU Bank Buyout Rules Nearing

The FDIC began courting private equity underwriters (PEU's) last fall. Draft guidelines looked tough, but those drew flack from the politically connected, big money boys. Sheila Bair will issue final regulations next week.

If they end up tough, Uncle Sam may have to provide more subsidy to PEU banks. Carlyle & company got $4.9 billion for a BankUnited. That's after the FDIC zeroed out shareholders. Watch for the PEU boys to eventually win.

Pensions Hurt by PEU Losses

Bloomberg reported:

U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.

Calpers ponied up $652 million in capital calls to The Carlyle Group when the markets imploded last fall. It was either that or try to dump their stake in the private equity underwriter (PEU).

University endowments and philanthropic foundations hurt by the worst economic crisis since the Great Depression have struggled to sell their stakes in private-equity funds to raise cash. Investors including Harvard University, in Cambridge, Massachusetts, planned to raise more than $100 billion through so-called secondary sales of limited partnership interests, some at discounts of at least 50 percent, people familiar with the effort said last year.
Financial "Masters of the Universe" Goldman Sachs started a fund to buy discounted private equity investments.

Rubenstein, of Washington-based Carlyle, acknowledges that the buyout industry faces tough questions.

“People have a lot of money in the ground and today it’s probably not worth what they had intended, but a turn-around in valuations is now beginning,” Rubenstein said in an interview. “You’ll probably see general partners and limited partners focused more on multiples of equity rather than just IRRs.”

Calpers had to cover their doubling down with a policy change:

Calpers in June raised its target commitment to private equity to 14 percent of assets from 10 percent.
How will their PEU bet turn out?

Wednesday, August 19, 2009

After Downing Booz, Carlyle Group Taken to Tasc?

The Carlyle Group, a politically connected private equity underwriter (PEU), may soon own two military and intelligence government contractors. How might that improve the PEU's odds of landing key government consulting business?

Carlyle purchased Booz, Allen, Hamilton in July 2008. Bloomberg reported they may bid on Tasc, a division of Northrup Grumman. The reported selling price is $1 to $2 billion. History reveals an interesting connection.

Northrop acquired Tasc in 2001 when it bought Litton Industries Inc. for about $5 billion. Tasc, formerly called The Analytic Sciences Corp., was founded in 1966 by engineers from the Massachusetts Institute of Technology and now has almost 5,000 employees, according to its Web site.
Northrup Grumman CEO Kent Kresa closed the 2001 purchase. He joined the Carlyle Group as Senior Adviser in November 2003. His most recent assignment? Remaking the GM board for the Obama administration.

Should Carlyle take on Tasc, in addition to slugging Booz, would it double its chances to tap Obama's black box kitty?

Tuesday, August 18, 2009

Carlyle Group's LifeCare: Legal Cases Post Katrina

News reports indicated LifeCare of New Orleans lost 24 patients after Hurricane Katrina, while Tenet Healthcare had 10 patients perish. That totals 34 patients for Memorial Hospital, owned by Tenet with LifeCare renting the seventh floor. Legal cases in the U.S. Court of Appeals, Fifth Circuit show 35 patients died. It's not clear under whose care the 35th patient expired.

The Carlyle Group considers risk management an area of expertise. They were unprepared for the risks of Hurricane Katrina, as patients suffered in a dead facility for up to five days. One could call it bad luck, as Carlyle closed on the LifeCare purchase just weeks before Katrina sideswiped New Orleans. Others could call it incompetence, as HCA helicoptered patients from it's powerless hospitals.

Having lived through the river flooding of a 725 bed hospital in Virginia and evacuated a 160 bed Texas Gulf Coast facility before a record Hurricane Gilbert, I know people within Memorial did their best in horrific conditions.

The trauma caused Robbye Dubois to resign as LifeCare's Vice President of Clinical Services. The legal case, Robby Dubois v. LifeCare Management Services LLC and LifeCare Holdings LLC No. 08-30227, states:

After several promotions, Dubois was named as LifeCare’s corporate Vice President of Clinical Services in 2003. She became overwhelmed with her job following Hurricane Katrina, however, and asked if she could change her employment arrangement. After an initial discussion with her supervisor, they agreed that she could be a consultant for LifeCare.
The company offered her a one year consulting agreement, but they never came to terms. Ms. Dubois sued for damages. She lost.

Dubois maintains that her resignation was not unconditional, as it was “based on LifeCare’s promise that she would remain employed as a paid consultant,” and that “when LifeCare backed out on its promise to keep plaintiff on as a consultant, the resignation was rendered ineffective.” However, as we have discussed, Dubois disagreed with the terms in the proposed consulting agreement and failed to further negotiate. There were no promises made.
If I were an attorney working LifeCare's 24 or 25 wrongful death lawsuits, I'd give Ms. Dubois a phone call. I'd also run down Earl Reed, former LifeCare CEO. Carlyle cut him loose two years after landfall. Does the Carlyle Group have risk managers monitoring such developments?

How Carlyle got the Bush White House to omit any mention of the hospital with the highest patient death toll is a testament to their political connections. Frances Townsend, author of the
Lessons Learned report, never shared the reason for her omission. But she did land a cushy job with Baker Botts, the law firm of James A. Baker, III, long associated with the Carlyle Group. Her job? Risk management consulting! Were any promises made?

Carlyle Group's ARINC Delivers in Egypt

The Cairo Airport opened a state of the art Terminal 3, a massive passenger facility capable of serving 11,000 flyers and 200 flights a day. Critical systems for terminal operation are provided by ARINC, an affiliate of The Carlyle Group. The press release indicates an impressive array of high tech systems:

ARINC has installed the world's first context-aware operational platform at Terminal 3, to control all employee access to critical ramp control and management applications.

ARINC has provided Terminal 3 with Egypt's first custom Biometric Immigration Gate (BIG) system, to streamline border control processing and reduce long security queues.

When qualified passengers use the automated biometric gates, Cairo Airport police can focus more attention on the manual screening of sensitive passengers, a major benefit to frequent travelers and a competitive advantage for airlines.

Did you detect any systems separating the have's from the have not's? I'm sure they're revenue generating.

ARINC delivered in Cairo, Egypt. It's not clear if they ever came through on the Russian helicopters for Iraq.

The Carlyle Group in Clover

Next up for The Carlyle Group? Cheap Irish real estate, according to the Irish Independent.

Top-level property firms and private equity funds, including Carlyle Group, Blackstone and British Land, have already expressed interest in buying up cheap Irish property that could come on the market as a consequence of the establishment of the National Asset Management Agency (NAMA).
The article suggests private equity underwriters (PEU's) are more interested in commercial real estate, office buildings and shopping centers with blue chip international tenants. The report also stated:

According to the RICS survey, of the 27 countries surveyed, 75% reported a rise in the number of distressed commercial property coming to the market. South Africa, the US, New Zealand, Hungary and the Caribbean reported greater increases than Ireland. China and Brazil showed the strongest markets.
With crisis, comes opportunity. With Carlyle, this is usually taxpayer aided. Creating one's luck requires an unlevel playing field. Ask Carlyle Group co-founder William Conway about his firm's field tilting capabilities.

Monday, August 17, 2009

Carlyle Group Affiliate Recommends Regulatory Reform

Carlyle Group purchased FRSGlobal in 2006. It is the "only provider of risk management and regulatory compliance reporting solutions on a unified platform with a single data model." It provides coverage for over 40 countries. Today it released an in depth report on "Global Regulatory Responses to the Financial Crisis." It is intended to guide international firms through the developing regulatory terrain.

It doesn't hurt to have senior Carlyle Group leaders chairing global and U.S. studies on financial reform. Carlyle co-founder David Rubenstein chairs the World Economic Forum study, while Senior Adviser Arthur Levitt heads a domestic study group. Is that part of FRSGlobal's marketing pitch? Banks are buying.

Senator John McCain at Qadhafi Ranch in Libya

The 2008 Republican candidate for President lounged over the weekend at the ranch of Libyan leader Col. Muammar Qadhafi. At least John McCain tweeted such:

Late evening with Col. Qadhafi at his "ranch" in Libya - interesting meeting with an interesting man.
It seems John McCain has a thing for politicians wearing fur. Or, it shows how much the former Libyan strongman has changed. Qadahafi's now a lobbyist hiring capitalist. His family members dine at fancy D.C. clubs, with one soiree sponsored by The Carlyle Group. Libyan newspapers indicated James A. Baker, III and Frank Carlucci attended. The U.S. press remained silent.

The Carlyle Group started a $500 million Middle East/North Africa fund with clear eyes on Libyan investments. Qadhafi also serves as President of the African Union. He wants to develop the economic side of the union, like the European Union or the Gulf Cooperation Council in the Persian Gulf.

Will Senator John McCain expound more than 140 words about his Libyan trip? How about President Obama, will he provide any insights?

Geithner Pulls Punches on UBS for Tax Cheating

CNBC reported on a deal in the works between the U.S. government and Swiss banking giant UBS. The IRS requested 52,000 names of possible tax cheats. The deal has 5,000 coming. What criteria will be used in the Ten Percent Solution? Are the 5,000 names based on:

1. Deposit size
2. Method of sequestration
3. Political connections
4. Political donations
5. Party affiliation

My major disappointment with a court not hearing the case? I wanted UBS Vice Chair Phil Gramm to testify, to tell the whole truth and nothing but the truth. That won't happen. The Government-Industrial Monstrosity looks after its corporate sponsors. Consider this from the NYT:

NZZ am Sonntag said the U.S. government had backed off from the original demands of the Internal Revenue Service (IRS) because the U.S. Treasury Secretary did not want to provoke another financial crisis by pushing UBS over the edge.

Hmmm, a tax cheater having compassion for tax cheats? The solution, pay up late, like Tim Geithner. Modified amnesty...

Altegrity-USIS History Symbolizes Government-Industrial Monstrosity

America's Government-Industrial Monstrosity (GIM) is Eisenhower's Military-Industrial Complex (MIC) on steroids. It now includes health care, education, and homeland security.

Uncle Sam is the contractor, footing the bills. It no longer conducts "make or buy" analysis. GIM buys from the private sector. It facilitates this by spinning off public sector functions/assets. Consider the case of USIS, a security firm recently rebranded as Altegrity.

1995-President Bill Clinton spins off the security investigation arm of the Office of Personnel Management. It is an employee stock owned firm. Government Executive reported "When USIS was formed, lawmakers were concerned about the job risk for employees leaving the protected confines of the federal government for the business world." It granted the company an exclusive contract in 1996 to perform background investigations and related work.

1999-The Carlyle Group invests in USIS as a minority shareholder.

2001-OPM conducted a new competition for its investigations work, and USIS won the contract again.

2003-Welsh, Carson, Anderson & Stowe (WCAS) paid $545 million for the firm. Employees got $500 million, while the Carlyle Group netted $45 million. Carlyle reinvested $172 million, along with USIS senior managers.

2007-Providence Equity Partners purchased USIS for $1.5 billion at the height of the buyout boom. WCAS, the Carlyle Group, and other investors made nearly a $1 billion profit.

What does this series of buyouts have to do with health care? Two for-profit hospitals changed hands during this period. HCA was bought out by KKR, a private equity underwriter (PEU) like Carlyle & WCAS. Community Health Systems acquired Triad Hospitals. SEC filings show a $2 billion increase in annual interest expense between the two firms. Costs rose by the billions without the addition of a hospital bed, doctors or high tech equipment.

Two of the firms above, The Carlyle Group and Welsh, Carson, Anderson & Stowe have huge health care portfolios. They just struck a deal. Carlyle's MultiPlan will acquire WCAS's Viant. Both firms offer health networks and cost management services to health plans. Will MultiPlan-Viant benefit from the White House/Senate's decision to drop a government run "public" insurance option? The government has ways of setting up sweet franchises for its friends and sponsors. GIM control-alt-deleted integrity.

Update: Altegrity is buying Kroll, the corporate security and investigations firm.

Update 1-31-14:   S&P said it believes Altegrity's capital structure is "unsustainable" and that it expects a selective default or a Chapter 11 bankruptcy filing.

Update 2-3-15:  Altegrity will declare Chapter 11 bankruptcy to wipe out $700 million in debt.

Sunday, August 16, 2009

Carlyle Group & Co to Bid for Texas Bank?

A consortium of private equity underwriters (PEU's) will bid on Guaranty Financial, the second largest publicly traded Texas bank. Guaranty has about $16 billion in assets. JP Morgan and other regional banks are reportedly bidding. FT reported:

A private equity consortium, which includes Blackstone Group LP, Carlyle, Oak Hill Capital, TPG and the Texas banker Gerald Ford, is also considering a bid for Guaranty.
How much government subsidy with this deal provide? Carlyle's last FDIC milking included $4.9 billion in FDIC subsidies. So many bad banks, so many PEU's...

Carlyle Group to Lose Another?

PE Hub reported that Standard & Poors downgraded American Achievement's debt to 'SD', selective default. American Achievement is an affiliate of The Carlyle Group.

AAC repurchased $65.3 million of 12.75% senior PIK notes (issued by ultimate parent company American Achievement Group Holding Corp.) in cash for a total of about $22.9 million. The downgrade of the corporate credit rating to ‘SD’ reflects our view that the purchase, which was executed at a price of $350 per $1,000 per principal amount of the notes, was executed at a significant discount to par and is tantamount to a default given the distressed financial condition of the company.

Not only did the Carlyle's AAC buy back debt for 35 cents on the dollar, they got a Baucus/Obama stimulus package $25 billion tax break. Does that hold if American Achievement goes under like Carlyle Capital Corporation, BlueWave Partners, Hawaiian Telecom, Edscha, and IMO CarWash? Who's next?

Don't worry, Carlyle co-founder David Rubenstein plans on using the same tactic to grow his stable. The private equity underwriter (PEU) is buying senior debt in distressed firms. Upon default, Carlyle gets the pink slip.

Saturday, August 15, 2009

FDIC Closes Five Banks over Weekend

The FDIC spirited Colonial Bank's deposits and assets to BB&T, while it shuttered four other smaller banks. This brings the total of bank failures in 2009 to 77. The AP reported on the FDIC's most expensive bank implosions:

The May closing of struggling Florida thrift BankUnited FSB is expected to cost the insurance fund $4.9 billion, the second-largest hit since the financial crisis began. The costliest was the July 2008 seizure of big California lender IndyMac Bank, on which the insurance fund is estimated to have lost $10.7 billion.

The largest U.S. bank failure ever also came last year: Seattle-based thrift Washington Mutual Inc. fell in September, with about $307 billion in assets. It was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.

Note the big money benefactors of these publicly overseen deals. BankUnited and IndyMac went to private equity underwriters/hedge funds. JPMorgan walked away with WaMu for pennies on the dollar. The next round of giveaways has the PEU boys salivating, but they won't play on anything other than their greedy terms. Will regulators continue to accomodate?

Another Thread in Carlyle Group Web

The Carlyle Group, a politically connected private equity underwriter (PEU), added to its connections in America's Government-Industrial Monstrosity, Eisenhower's Military-Industrial Complex on steroids. Roll Call reported:

August is a time not only for recess and rowdy town halls but also for a little romance. Harrison Frist, the oldest son of former Majority Leader Bill Frist (R-Tenn.) and an associate at the Carlyle Group, proposed to his girlfriend, Ashley Huff, an aide to Sen. John Cornyn (R-Texas), at the top of the Capitol Dome on Aug. 6.

A friend of the couple said they met on President George W. Bush’s 2004 campaign and came to the Capitol for their first date, waiting in line to pass by President Ronald Reagan’s casket in the Rotunda that summer (not the usual first-date venue)

Carlyle grew by leaps and bounds during the Bush years. The PEU's smashing success symbolizes the widening divide between the have's and have not's fostered by Republicans, especially Harrison's father. Carlyle is primed to continue their grand returns, given their blue connections.

After Harrison and Ashley tie the knot, maybe Senator Cornyn will ask Mrs. Frist to research my longstanding unanswered question. Why did the Bush Lessons Learned report omit the hospital with the highest death toll during Hurricane Katrina? There is a Carlyle Group connection.

Wednesday, August 12, 2009

Pete Peterson's Blackstone Sold at the Height, Buyer Maquire Defaults

REIT Maguire Properties defaulted on loans involving seven office buildings in Southern California. Lenders received keys to the towers on August 10. BusinessWeek reported:

Maguire Properties is unusual both because of the quality of its assets and the magnitude of its debt problem, notes Michael Knott, an analyst at the real estate investment firm Green Street Advisors. The company has assets of $4.4 billion and outstanding loans of $4.6 billion. Many of its current woes trace to Maguire's $3 billion purchase of office buildings from Blackstone Group (BX) in 2007.
Blackstone Group co-founder Pete Peterson is a very lucky man. He made over $1 billion when Blackstone went public. How much did he make from the Maguire purchase? How much did he save from carried interest taxation? Peterson clearly landed in the green. Maguire is now in the red.

The Fed and Treasury may explore imploding real estate deals.

The Federal Reserve is expected to take a hard look at commercial real estate starting on Aug. 11, when the Federal Open Market Committee meets. Some members of Congress have been asking federal regulators and bankers to extend the Term Asset-Backed Securities Loan Facility (TALF), which aims to create liquidity in the market for real estate-related securities.
Structured Credit Investing reported little backlash from the Maguire default on US CMBS pricing. Is it priced in already? Or is the market counting on Uncle Sam to once again ride to the rescue? That horse must be mighty tired.

Tuesday, August 11, 2009

Carlyle's Ports Proposal: Yes Virginia, There is a Santa Claus!

The Carlyle Group submitted a conceptual proposal to lease the Port of Virginia for 60 years. The Old Dominion undertook a bidding process after an unsolicited proposal by CenterPoint Properties in March. Goldman Sachs is involved in another competing bid.

Carlyle's conceptual proposal starts off with their "commitment to Virginia":

Headquartered in Washington, D.C., Carlyle is a global private equity firm situated locally. Over 150 Carlyle employees and their families live in the Commonwealth of Virginia (the “Commonwealth”), including two of its three founders, Bill Conway and Dan D’Aniello. Glenn Youngkin, a member of Carlyle’s operating committee, grew up in Richmond, Virginia and currently resides with his family in northern Virginia. As such, Carlyle has a direct and strong constituent interest in the economic development of Virginia. In addition, Carlyle’s portfolio of companies includes Virginia companies such as Booz Allen, which has over 12,600 employees at its headquarters in McLean, Virginia. In the mid‐Atlantic region, Carlyle portfolio companies have over 25,000 employees in businesses that are among the leaders in the industrial, aerospace, and consumer sectors.
It then goes on to highlight Carlyle's strong interest in infrastructure:
Recognizing the interrelatedness of the North American freight transportation system, Carlyle has made infrastructure assets in this area a priority in its infrastructure fund. Carlyle Infrastructure Partners was established in 2006 to focus on private equity investments in infrastructure primarily in the U.S. and Canada.
The proposal included:
"Carlyle is interested in entering a long‐term (60 years +) concession of VPA’s Port Facilities including Craney Island."
Carlyle would acquire the current operator of the ports, Virginia International Terminals (VIT).

"Given VIT’s long operating history of the Port Facilities and its familiarity with the shippers and the contracts, we believe VIT is best positioned to continue to operate the Port Facilities with no disruption to the operations of the local maritime community. While we considered the possibility of contractually retaining VIT as the operator, Carlyle believes that the most efficient way would be for VIT to become a wholly‐owned subsidiary of the Concessionaire"
Carlyle won't take over all functions.
The Virginia Port Authority(VPA) "would continue to be a public sector entity with the primary role of monitoring, providing security, and promoting general economic development...We assume that VPA can consolidate much of its staff into VIT for this process and that very little staff will necessarily remain at VPA. However, to maintain the necessary staff for the remaining functions, we intend to provide the VPA with an annual, inflation indexed cash flow stream."
After garnering the Port's operational expertise for a sixty year period, what happens?

"At the end of the concession period, VPA would get the terminal assets back, but not the VIT operating company. The Commonwealth and VPA would need to either contract for continuing operations at that time, or enter into another concession for the Port Facilities at that time."
Private equity underwriters brag about their ability to raise investment funds for projects. How does this expertise come into play?

"...We believe that the Commonwealth and the Federal Government will need to provide much of the capital required to prepare the site for a terminal."
Back to Carlyle's connectedness:
"When discussing long term strategy of the Port Facilities, it is essential to mention Carlyle’s commitment to a continuing partnership with the U.S. Navy, the U.S. Coast Guard, the Department of Defense, and other critical federal agencies that have operations in and around the area."
They close with financial terms which show a range of $500-700 million initial payment and profit sharing which increases as Carlyle's internal rate of return goes up. Yet, there is a qualifier to this "bid".

Many assumptions remain undecided, and many arrangements remain un‐assumed in this calculation. As a normal practice, submission of a “detailed proposal” as contemplated under the PPTA guidelines is subject to completion of due diligence and prior approval of our investment committee.
In other words, Carlyle didn't respond to a request for proposal that enables an apple to apple comparison. The state didn't require it.

Unsolicited proposals must "generally meet the quality control criteria established by the Commonwealth for Public-Private Transportation Act proposals" and "generally address the applicable goals, principles and priorities of the Commonwealth relating to the Port of Virginia."
This enables Carlyle to pull their usual connections, keeping the taxpayer on the hook during the deal and at serious risk when the lease expires. Carlyle co-founder and Northern Virginia resident Bill Conway hates a level playing field.

Yes Virginia, there is a Santa Claus and his name is Pierce Homer, Secretary of Transportation.

Monday, August 10, 2009

Carlyle Group Puts Freeze on Japan

Nikkei reported the Carlyle Group suspended investments in medium and small Japanese firms, shifting emphasis to India and China. Is this a move to pressure Japanese leaders to lower capital gains taxes from 40% to zero? That tax strategy was under consideration to lure foreign investment.

Carlyle's freezing new Japanese investments could give elected officials needed motivation.

The Race to the Bottom

Wall Street firms packaged investment pigs. Rating agencies applied the lipstick. Bond insurers happily raked in the cash, while ignoring sins of the former two groups. Finger pointing between the triumvirate degenerated into lawsuits. Reuters reported:

Ambac filed suit against CitiBank and Credit Suisse for losses on Ridgeway Court Funding II

MBIA sued Merrill Lynch, now Bank of America for CDO losses

Ambac is suing JP Morgan Investment Management for over $1 billion in losses in Ballantyne Re PLC
I heard the Carlyle Group's David Rubenstein lament America's litigious society during an Aspen Group panel discussion. The big money boys are happy to have recourse through the courts, when they feel wronged. Take Carlyle's lawsuit against the Russian firm that backed out on buying steelmaker John Maneely.

What happens when the financial big money boys sue one another? This is only the civil side. Will any criminal charges of fraud ever be brought? The wheels of justice grind slowly.

Sunday, August 9, 2009

Carlyle Group & Extell Development Company Offer Contract with Wrong Date

Developers of The Rushmore, a new apartment tower on Riverside Drive, failed to get the correct date in the contract with apartment buyers. The New York Post reported:

The 732 page offering plan stated buyers could get their money back if the building wasn't ready by Sept. 1, 2008, instead of Sept. 1, 2009, as Extell and Carlyle say they intended.

At least 25 people so far have filed applications with the Attorney General's office to get back more than $10.3 million in down payments on purchases totaling $71 million. Four more people are considering filing for a refund.

The article has Extell and Carlyle pointing fingers at the law firm that drew up the contract. Does anyone proof read anymore? The Carlyle Group has a history with litigation and it isn't pretty. They'll save their corporate backside first.

Carlyle Group's Two Slots on GM Bode Well For Auto Affiliates

The U.S. Treasury Department appointed 10 of GM's 13 board members. Two of those slots are occupied by the Carlyle Group, a testimony to the private equity underwriter's buyout skills and high level political connections. The PEU has a track record of reading government tea leaves and making a mint off the federal taxpayer.

Kent Kresa served as interim Chairman of General Motors. After leaving Northrup Grumman, Mr. Kresa served as Senior Advisor to the Carlyle Group.

named to the GM board is Daniel Akerson, Managing Director of the Carlyle Group.
What will this pair do for Carlyle's substantial automotive portfolio? Carlyle just added Metaldyne to their automotive stable. How will GM steer business to the politically connected PEU? And how will Rahm Emanuel help? Surely, GM came up in the White House Chief of Staff's dinner meeting with Carlyle co-founder David Rubenstein.

Friday, August 7, 2009

5th Annual Clinton Global Initiative Sponsored by Carlyle's Booz Allen Hamilton

The Clinton Global Initiative will gather again to "make progress on great global challenges." Four action areas include:

Harnessing Innovation for Development

Technological, business, and organizational innovations that translate today’s social and environmental challenges into opportunities for development can be a critical source of economic value. Leading corporations are creating new products and services to meet worldwide demand for affordable, nutritious, and safe food; decent housing; capital; energy efficiency; and more.

Strengthening Infrastructure

In the absence of clean water, health facilities, housing, transportation, clean energy, and other vital systems, societies and businesses will not realize their full potential. Governments around the world are expanding their financial commitments to infrastructure, creating diverse investment opportunities and improving the quality of life for societies.

Building Human Capital

Businesses and societies require a healthy, well-educated, and properly trained workforce to thrive. Yet fundamental education and labor-market challenges threaten the well-being of global workforces. As the global community seeks to recover from an economic slowdown, job creation will be more important and challenging than ever. Fortunately, there are opportunities to be seized in emerging industries and markets, where jobs can be created in ways that also address social and/or environmental challenges throughout the supply chain.

Financing an Equitable Future

Despite the current economic crisis, investment opportunities are expanding in emerging markets that promise to contribute to sustainable economic growth and development worldwide. A new destination for capital is “impact investing,” which aims to generate financial returns in addition to social impact. Cooperation between the public, philanthropic, and private sectors is essential to build a sound financial infrastructure to support the growth of impact investing.

How many private equity underwriters (PEU's) will attend? They'll have the opportunity to rub elbows with an amazing group of high octane leaders. WaPo reported:

High-level political attendees will include Secretary of State Hillary Clinton (okay, no surprise there), Larry Summers, Valerie Jarrett and more than 30 current and former heads of state. From the financial industry, Goldman Sachs CEO Lloyd Blankfein and J.P. Morgan Chase CEO Jamie Dimon will be there, along with Cisco CEO John Chambers, WellPoint CEO Angela Braley, and Mexican investor Carlos Slim.

The Carlyle Group likes to keep their good name out of the media, but this is clearly their milieu. Having affiliate Booz Allen Hamilton as sponsor won't hurt Carlyle's global profit making goals. Connections like this drive 25% annual investment returns. Carlyle and its peers will profit handsomely from public-private partnerships. How will President Bill Clinton's Fifth Global Initiative further that aim? It's happening September 22-25 in the Big Apple.

Does anyone else find it ironic that Booz is paying for the Fifth?

Banks Don't Go Back to Basics

When Wall Street imploded in September 2008, many called for a return to basics in finance. BusinessWeek reported many banks are doubling down, offering predatory payday loans to risky borrowers and packaging financial chainsaws (credit derivatives) with corporate credit lines. Also, they're selling structured notes to small investors. What are they? Investopedia says:

Structured notes are a debt obligation that also contains an embedded derivative component with characteristics that adjust the security's risk/return profile. The return performance of a structured note will track that of the underlying debt obligation and derivative embedded within it.
Another definition:

Structured notes are financial products that appear to be fixed income instruments, but contain embedded options and do not necessarily reflect the risk of the issuing credit. These options may be "plain vanilla" or they may be highly leveraged exotic options. Due to the fact that each one is unique, the risks inherent in any one structured note may not be obvious.
Payday loans, derivatives for small investors, forced credit default swaps for corporate credit lines? Banks are back to Wall Street basics, greed.

Thursday, August 6, 2009

ECW and PEC Make News

The Economic Club of Washington hosted Christina Romer, Obama's chief economist. Carlyle Group co-founder David Rubenstein introduced Ms. Romer. Rubenstein conducted the Q & A session following her remarks.

Later in the day, the Private Equity Council asked for relaxed regulations for private equity underwriters (PEU's) buying banks. They want lower capital requirements than proposed and a shorter term investment window, 18 months vs. 3 years.

The FDIC will move fast in finalizing the guidelines. Like health care reform, the devil will be in the details. The PEU devils are primed to get their way. They know how to generate huge profits on the taxpayer's back.

Congress and the White House know how to fork over huge chunks of government business to PEU's, when not granting direct handouts. Carlyle & company got $4.9 billion in FDIC subsidies in their purchase of BankUnited.

Wednesday, August 5, 2009

Coming Wall of PEU Refinancings

Private equity underwriters borrowed heavily during the go-go buyout years. They put down as little as 15% in a cheap credit environment. Times changed, but the deal clock still ticks. At the 2009 Wharton Private Equity & Venture Capital Conference, a panel spoke of major refinancings in 20012-2013. Consider the words of one private equity underwriter (PEU):

Peter J. Clare, managing director at the Carlyle Group, predicted that credit markets would remain expensive for close to two years, suggesting it would take at least that long for the banking system to get its bad assets off the books and recapitalize.
It turns out the banks aren't the only ones with a problem. Carlyle's HCR ManorCare has billions in securitized debt going for a discount.

The health care properties REIT HCP has acquired a $720-million stake in first mortgage debt of HCR ManorCare at a discount for approximately $590 million. The $720 million participation represents 45% of the $1.6 billion most senior tranche of mortgage debt owed by Toledo, OH-based HCR ManorCare, which operates skilled nursing and rehabilitation centers.

Their highest quality mortgage debt sold at a $130 million discount, an 18% haircut. HCR ManorCare's $3 billion in mortgage debt comes due in 2012. Who will step up and refinance?

What do good financial vultures do during difficult times? They look for new ways to find carrion.

Regarding the risk-return ratio, Clare added, the debt market represents one of the best investment options. He suggested thinking about this market as two buckets. One is the debt of healthy companies returning 15% to 25%. The other is the debt of distressed companies that could be purchased to gain control of the business or drive it into a restructuring. Such an approach will become increasingly popular, he said, though it is still early in the process. A lack of covenants and other mechanisms that would trigger default sooner are delaying inevitable restructurings. "Given the maturities, this is going to continue for four or five years at a minimum. We're in the top of the first inning in terms of restructuring and distressed-debt opportunities."

Forced divestitures will also provide opportunity, he said. Major companies under pressure, such as AIG and Citigroup, will need to unload desirable businesses. "It will take a while for buyer and seller expectations to line up." However, "the companies that become available to us will be at valuations that are more attractive."

Carlyle will buy debt and take over companies via the back door. Peter should know as it happened to Carlyle with SemGroup, an energy pipeline company. Senior lenders stand ready to take over Carlyle's IMO Carwash. Thus, Carlyle wants friendly firms holding their affiliates' debt. HCP must be the good guys.

They'll also buy distressed assets from companies under the financial gun. Carlyle's good deal on AIG and CitiGroup businesses likely mean less in taxpayer pay backs.

But there's more. Cash strapped municipalities and states will sell off prime public infrastructure on the cheap to the PEU boys.