Saturday, November 2, 2019

Carlyle Co-Founder Rubenstein History Maker

The Guardian ran a piece on Carlyle Group co-founder David Rubenstein and his historic life as a modern day robber baron.  The story began with Rubenstein's revealing interview at The Economic Club of Washington, D.C. 

Rubenstein interviewed Secretary of State Mike Pompeo in late July.  Pompeo noted President Donald Trump's use of financial leverage to achieve diplomatic goals.  Somehow burnishing Trump's image and re-election chances became a U.S. diplomatic goal.

MR. RUBENSTEIN: OK. So, when you have decisions with the president, meetings with him, is he best with oral communications, written communications? What’s the process by which decisions are made? Is it through the NSC10 or informal?

SEC. POMPEO: Yeah. So, there’s a very robust NSC process. When I brief him myself, I always prefer to have a document. It’s the way I prefer to receive information. So, I almost always bring something – a one-page summary at the very least, that says here’s the outline of what it is that I think are the priorities now. We should think about how we should frame this particular problem. And then the president does like to engage in oral exchanges. And I’ve found them to be elucidating for myself. I often learn things as well. He’s very focused on where the money is, and how we use economic leverage to achieve our diplomatic ends.
The piece ignored Rubenstein's profiting from the American military-corporate-economic juggernaut.  That is part of The Carlyle Group's history.

David Rubenstein has a book to sell, in addition to his ever present cheer leading for private equity underwriters (PEU), also known as the greed and leverage boys.  His book highlights great men among our Founding Fathers.

Thomas Jefferson was the first businessman to use his slaves a collateral for debt.  The Smithsonian wrote:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan taken out in 1796 from a Dutch banking house in order to rebuild Monticello.  He pioneered the monetizing of slaves, just as he pioneered the industrialization and diversification of slavery.
The Carlyle Group used very large loans for Carlyle Capital Corporation.  CCC's 2007 year end results stated:

As of February 27, 2008, the Companys $21.7 billion investment portfolio is comprised exclusively of AAA-rated floating rate capped residential mortgage backed securities issued by Fannie Mae and Freddie Mac, which are considered to have the implied guarantee of the U.S. government and are expected to pay at par at maturity. 
One week later Carlyle Capital Corporation was in deep trouble:

Carlyle Capital Corporation touched off a wave of selling on Thursday, especially in mortgage real estate investment trusts, after the company failed to meet some of its margin calls and received a default notice.

Carlyle Capital is a European listed, publicly traded company that is an affiliate of the much larger Carlyle Group, a private equity firm.

Carlyle Capital apparently received margin calls from seven different parties on Wednesday, totaling $37 million dollars. The company said that these parties demanded additional collateral and that Carlyle Capital was unable to satisfy four of their demands.

Carlyle Capital fell 58% on Thursday, touching off a wave of selling across the world that saw some REITS fall as much of 20%. The company is listed in Amsterdam.

According to a report in Bloomberg, most of Carlyle's counterparties are Wall Street firms
Two weeks later Carlyle revealed CCC would declare bankruptcy.  BBC reported:

On Wednesday, CCC said that it had not been able to refinance its business. It said it had so far defaulted on about $16.6bn (£8.1bn) of its debt and the only assets it had left were US government AAA-rated residential mortgage-backed securities. 

CCC said it also expected to default on this after the portfolio's value was marked down again on Wednesday.
On March 16, 2008 Reuter's reported:

Carlyle Capital, an affiliate of U.S.-based buyout firm Carlyle Group CYL.UL, said it has received default notices from its last two remaining lenders and believes that its lenders have now taken possession of substantially all of its U.S. government agency AAA-rated residential mortgage-backed securities (RMBS).
Carlyle Capital had $600 million in equity and $21 billion in debt.  A lawsuit revealed how Carlyle set up CCC's financing:

The RMBS assets were purchased using one-month repurchase (repo) borrowing. The assets were subject to daily margin calls if prices changed.
Financing long term assets with short term money, what could go wrong?  That question was not asked of Mr. Rubenstein.  It has bearing today as the Federal Reserve Bank entered the repo lending market in a big way

Carlyle danced away from CCC's carcass as it neared an IPO for China Pacific Insurance.

Previously, Carlyle Group announced that it was just an investment consultant for Carlyle Capital, under the agreement between them, and it did not buy any securities of Carlyle Capital, although some persons in Carlyle Group totally hold an about 15% stake in Carlyle Capital.
One might expect better from a storied private equity firm.  BBC noted at the time:

"Almost within the blink of an eye, a business that had borrowed $21bn from the world's biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput," said BBC business editor Robert Peston. 

"Such is the whirlwind blowing through global financial markets."
Six months after CCC's implosion the Financial Crisis hit.  Did that whirlwind grow into a Category 5 hurricane in part due to The Carlyle Group's actions?  Not asked, thus not answered.

Another item not recorded for history is why the Carlyle Group withdrew completely from the Corpus Christi oil shipping terminal at Harbor Island.  Carlyle lauded their role as "exclusive developer" one short year ago.

Trump's ongoing greatness and Rubenstein's ever present greed are unique in history. Neither make for an honest exploration of events.

Update 11-4-19:  PEU Blackstone's chief strategist warned the "mother of all bubbles" could blow up.  One sign of instability cited is the failure of the repo market.  JessesCafeAmericain shared a quote worthy of PEU founders and their exalted status:

"His money came from human misery and death and despair, as always it does.  Yet, there is none to reproach him, neither God nor man, and all fawn upon him and he will be a senator and crowds will laud him and he will have the ear of the President and all will honor his riches and consider him worthier than other men because of it.
Mankind adores its betrayers, and murders its saviors."

Taylor Caldwell, Captains and Kings
Update 11-5-19:  CNBC interviewed Carlyle co-founder David Rubenstein.  The PEU greed and leverage boys hate paying taxes.