Tuesday, December 16, 2008

Hair of the Dog from the Fed

The Federal Reserve Bank announced it would keep the Fed funds rate at record low levels, while it buys mortgage backed securities. It wants to get loan securitization restarted.

Isn't this the same juice that fermented the American economy? Imagine if Johnson & Johnson kept cyanide tainted Tylenol on the shelf. What if J & J asked the federal government to buy traunches of possibly poisonous product, while they kept production lines running?

Of course, non-tampered caplets have residual value. The government will resell them later. Just do it before the expiration date!

Our current economic hangover hurts like heck. Hair of the dog should get rid of it. Where's the next round of greed and leverage? Who's willing to lie, cheat and steal for performance based pay? There are no executive pay restrictions when the Fed TARPies! Let your hair down, Ben Bernake...

Fed Loaned Lehman Brothers $138 Billion Post Bankruptcy

The Bush administration cited it had no choice but to let Lehman Brothers fail. Months before, it saved Bear Stearns. Within days it rescued AIG. Treasury and the Fed said their hands were tied in mid-September as Lehman cratered.

Andrew Ross Sorkin reported the Fed loaned the firm $138 billion shortly after the bankruptcy. Why did they say one thing, and do another?

I believe politics played a major role. A Republican administration bailing out the President's close relatives wouldn't do. Bush cousin, George Herbert Walker, and brother Jeb worked for Lehman.

Sarah Palin had yet to botch basic interview questions and the race was close. Did Lehman fail to save the Bush brand?

Jeb and George Herbert Walker came out smelling like roses. They kept their share of the $2 billion bonus pool. The bankruptcy judge chose not to roll those funds up to satisfy creditors.

The judge granted a second gift when he selected Mr. Walker and management's bid for Neuberger Investment Management over Bain Capital's. Cousin George got the firm for half price with no money down. Sweet!

Bush's open and transparent financial rescue reflects none of this. The Fed considers its $2 trillion in loans and collateral "trade secrets". It looks like more Bush sponsored Corporafornication to me.

Arthur Levitt's SEC

Ex-Securities and Exchange Commission Chair Arthur Levitt defended his agency relative to the $50 billion Bernie Madoff Ponzi scheme. NYT Dealbook reported:

“At this point, I don’t see any evidence that the S.E.C. dropped the ball,” Mr Levitt, now an adviser to Carlyle Group, told the newspaper. Mr. Levitt was known for his investor-friendly administration at the regulator.

Harry Markopolos shared his concerns with the SEC in 1999. What did Arthur's SEC do? Anything? What about the SIPC? Who reviewed Madoff's auditors, sworn to uphold the public trust?

Did the SEC drop the ball elsewhere? They failed with backdated stock options. It took a college professor to find the widespread illegal scheme maximizing CEO compensation. Cheating occurred in 30% of stock options studied. The SEC slapped a few hands for robbing shareholders. Most executives got off Scott free. Ask Apple's Steven Jobs.

Mr. Levitt is a Senior Adviser of The Carlyle Group. I have some Harry Markopolos like questions regarding one of their affiliates, LifeCare Hospitals.

LifeCare lost 24 patients in Hurricane Katrina, the largest death toll in any Gulf Coast hospital. Carlyle purchased the company two weeks before landfall. Yet, LifeCare's two dozen deaths warranted not one mention in the White House Lessons Learned report. Why not?

Frances Townsend, White House Homeland Security adviser, jumped on a plane to Saudi Arabia while New Orleans sat in toxic gumbo. When she returned, Fran crafted the investigative report. What else did she leave out?

LifeCare rented a floor in Memorial Medical Center. Memorial lost 10 patients. MMC was owned by for-profit Tenet Health. While HCA chartered medical helicopters to evacuate patients from dead hospitals, Tenet and LifeCare let staff and patients swelter in a stinking death house. None of that was mentioned.

There are odd coincidences. George W. Bush served on the board of Carlyle affiliate, CaterAir in the 1990's. Carlyle's corporate office is just down Pennsylvania Avenue from the White House, 1001 vs. 1600. A year after the White House released their "ro"-less bust of an investigative report, Tenet Health appointed Jeb Bush to their Board of Directors, at significant annual compensation.

"At this point I don't see any evidence where LifeCare or Tenet dropped the ball."

If it's not in the report, it's very hard to see.

Monday, December 15, 2008

PEU's Commission Study for U.S. Economic Future

The trade group for private equity underwriters (PEU'S) hired two economic experts to weigh in on America's economy and priorities for our new government. The authors represent the center-right of the economic spectrum. Martin Baily served in the second Clinton administration, when President Clinton privatized USIS. The Carlyle Group flipped USIS for a hefty profit. Martin is the centrist. Matthew Slaughter served under the first President Bush.

The study focused on four areas: infrastructure, tax policy, education and training, & international trade policy and regulation.

The PEU boys want in on infrastructure. They're willing to drop their 30% annual returns for long term guaranteed infrastructure profits of 15-20%. That's on top of management fees they charge affiliates.

They'd love to keep their preferred taxation on carried interest. If not, at least delay the change as long as possible with a bi-partisan study.

The study failed to highlight the burden of nearly 50 million uninsureds on America's health care system, but it did imply business can't carry the burden of ever increasing health care costs.

PEU boys like cheap labor. If they can't export jobs, then import workers willing to work for less. Thus, eliminate caps under the H-1B visa program for highly skilled workers. They also want public institutions to fund worker training.

The study hedges on regulation, despite the Bernie Madoff's of the world. While we wait for the next $50 billion Ponzi scheme shoe to drop, regulation should not "discourage competition" or "micromanage industries."

Will Congress and the Obama administration play the PEU game? Highly likely. The connections are in place. The study is complete. It's time to close the sale. The Carlyle Group and company have the thoroughbreds to do it.

Saturday, December 13, 2008

Carlyle Group Uses European Study to Promote U.S. Private Equity

The Carlyle Group posted results of a study on employee treatment under private equity ownership. Only they didn't interview employees. They sampled 190 human resource professionals and company executives. The results?

Number of companies with a unionised workforce is static post-buyout at 71%. No surprise, given their relatively short term ownership position and goal of flipping for large profits. How did union leaders feel about PEU ownership? Oh, they weren't interviewed.

Real earnings of non-managerial employees increased in just over half (51%) of cases. A large minority of 47% experienced no change. How does this vary by union membership?

Availability of occupational pension schemes increased from 76% of companies before a buyout to 81% afterwards. Are non pension retirement options included, i.e. the European version of 401(k)'s?

Amount spent on non-managerial employee training increased post-buyout in 45% of cases, and fell for just 3%.

Employee commitment best practice increases, with regular team briefings up from 71% to 90% of cases. Briefings are good, but what's the impact on product or service quality? Boeing cited Carlyle's Vought Aircraft for numerous delays in its 787 Dreamliner program.

The proportion of private equity-backed companies that had a consultative committee in place increased from precisely half before the buyout to 63% afterwards. And the impact of such committees on pay, benefits, safety, workplace conditions?

Carlyle Capital Corporation failed. So did Blue Wave Partners and SemGroup declared bankruptcy, as did Hawaiian Telecom. How many of those made the sample? They didn't.

The study involved European private equity owned companies. It was conducted prior to the global financial implosion.

How do 100 Carlyle Group nonunion employees feel about their layoff? How will politically connected Carlyle spin this study, as they look to pick up broken banks for a song? The survey doesn't say. Might Carlyle? Stay tuned...

The Ghost of Pharma Quality

The Food and Drug Administration planned to allow drug companies to market "off label" uses of their products as long as an article on the practice has been published by a trade magazine.

Merck manipulated dozens of publications to promote Vioxx, a dangerous drug. The drug maker drafted dozens of research studies for a best-selling drug, then lined up prestigious doctors to put their names on the reports before publication.

Wyeth paid ghost writers to produce favorable journal articles on Prempro. Company executives came up with ideas for medical journal articles, titled them, drafted outlines, paid writers to draft the manuscripts, recruited academic authors and identified publications to run the articles — all without disclosing the companies’ roles to journal editors or readers.

Buyer beware belongs in the era of snake oil salesman. It's return under the George W. Bush administration is most disturbing.

Friday, December 12, 2008

Carlyle Group Gets CalPERS Sponge for Bloody Financial Gutters

The Carlyle Group gained $150 million for its distressed financial assets fund. Pensions & Investments reported:

CalPERS committed $150 million to Carlyle Global Financial Services Partners, a new private equity fund that will target distressed sellers and divisional carve-outs in the financial services industry, such as banking, insurance, asset management, financial technology and consumer and commercial specialty finance companies.

CalPERS and Carlyle are ready to mop up in the midst of carnage. I trust they can wash the blood off.

PEU Boys Keep $750 Billion on Sidelines

Private equity underwriters (PEU's) have significant uninvested assets, to the tune of $750 billion. Reuters reported:

Private equity is sitting on some $450 billion of capital committed for buyouts, according to data from consultancy firm Preqin, with funds still on the road targeting a further $300 billion.
While the Bush administration mobilizes over $7 trillion in public funds, the private sector watches from box seats. Sometimes, they make an order. The Carlyle Group has $40 billion in uninvested capital, yet affiliate Boston Private Financial Holdings received $153 million in TARP money. What do those tea leaves say? Despite $750 billion in dry powder and Uncle Sam's good will, investors dump private equity investments, some for less than 50 cents on a dollar. Tea leaves say investment is dead for many investors, killed by greed and leverage.

$50 Billion Ponzi Scheme Madoff Signs Out of Jail

The Jerusalem Post said Bernie Madoff signed out of jail after his arrest for defrauding investors of $50 billion. His victims included high net worth individuals, hedge funds, institutional customers and Jewish charities. How could this happen?

Bernard L. Madoff Investment Securities was founded in 1960. It operated more than two dozen funds. Did they have a board of directors? Who did their audits? How could internal accountants keep quiet under such conditions? Where was the SEC? Madoff's website states:

Madoff Securities is a registered US broker/dealer regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, Inc.

He lauds his firm as a member of the SIPC? Where were they while Bernie milked new investors to pay off old?

Who steals billions and exits jail under their signature? Bernie Madoff did under George W. Bush's "zero tolerance" America. Madoff, the latest nail in the coffin of investing.

Wednesday, December 10, 2008

Lehman's Neuberger: $1.2 Billion in Bush Beats $2.15 Billion from Bain

President George W. Bush's close relations got the deal of a lifetime. For zero down, i.e. no cash, George Herbert Walker and Neuberger's management got 51% of an independent Neuberger Investment Management. The bankruptcy court chose the certain $1.2 billion stock deal over a prior bid by Bain Capital for $2.15 billion.

The Bush family wins again. Cousin George Herbert Walker is NIM's Chairman, while brother Jeb retains his advisory role for their private equity group. Bloomberg reported:

Neuberger management received the deal of a lifetime by obtaining 51 percent of the common stock for no cash.

But more Bush sponsored Corporafornication. (Update: the deal is worth $922 million after adjustments)

Carlyle Short on Chinese Guanxi

The Carlyle Group lost a Chinese medical research company due to lack of "guanxi", connections in English. It's rare for the politically connected private equity underwriter to lose deals in such a fashion. Co-founder William Conway likes a playing field tilted in Carlyle's favor.

Carlyle has the stable to steer deals and garner big government business in many parts of the world. They had the horses to sell American airport operations to Dubai Aerospace without a peep from the media. Landmark Aviation and Standard Aero sold between the out roars over Dubai Ports World's purchase of U.S. port operations and the Dubai Bourse buying a chunk of NASDAQ.

When the Chinese clinical research firm backed out of the deal, they sent an e-mail to Carlyle with "pray forgive". Carlyle sued for $206 million.

It's not the first time Carlyle mobilized teams of attorneys. They sued Tenet Health on behalf of affiliate LifeCare Hospitals. The two firms settled liability for Memorial Medical Center after Hurricane Katrina. Thirty four patients died, 10 at Tenet's MMC & 24 in LifeCare's LTAC unit which rented space in Memorial. The settlement is secret.

LifeCare lawyers blamed rogue clinicians, yet a grand jury failed to indict Dr. Anna Pou. Carlyle legal experts then pointed the finger at the feds. Their novel claim suggests LifeCare patients became wards of the federal government as soon as FEMA evacuation teams set up in New Orleans. This defense is laughable to health professionals. How does this pass as sound management or legal practice? Only in the world of avoiding responsibility or protecting one's good name.

Carlyle's not having the guanxi to close the China deal could be a mirror experience. Is there an image to see?

Monday, December 8, 2008

Carlyle's Mack McLarty Teams Up with Carlyle's Bob Johnson on Dealerships

A week after the credit crisis hit, a Carlyle Group Senior Adviser and joint venture partner got together to purchase a Little Rock Harley Davidson dealership. Mack McLarty and Robert L. Johnson did the deal. Fortunately, the big money men had the resources to close, even as credit evaporated.

The Carlyle Group has a history of discerning federal tea leaves. Affiliate Boston Private will pocket $153 million in TARP money.

Will Mack or Bob garner any of the Big 3 auto bailout money, given their status as the largest minority owned dealership group? If dealers don't get a chunk of phase 1, are they angling for a post Obama giveaway?

Billionaire community banker Bob Johnson milked his minority status in a picture with President Bush. I think his status helped Urban Trust in the federal student loan arena, where they partner with Goldman Sachs.

Pay attention, folks. $7 trillion is washing through our financial system and a $1 trillion stimulus package is soon to follow. The big money men want their hands on America's sovereign IOU fund.

Where there's a will, there's a way. The Carlyle Group, Mack McLarty, and Bob Johnson understand both will and way.

Carlyle Group Scrubs IMO's Balance Sheet

The Carlyle Group purchased IMO Car Wash last year for 450 million pounds, borrowing 350 million from banks. Hemscott reported Carlyle hired NM Rothschild to help restructure the debt. IMO has 300 Arc Clean Car Centers in Britain.

How does a private equity underwriter (PEU) gain leverage on banks holding their corporate debt? Would owning credit default swaps on IMO help Carlyle negotiate? How do the SemGroup, Carlyle Capital Corporation, Blue Wave Partners, and Hawaiian Telecom bankruptcies factor into the bank's decision?

Carlyle has $14 billion ready to buy distressed debt. How much PEU affiliate debt will they buy on the cheap? Stay tuned.

Sunday, December 7, 2008

America's Economic Undevelopment

In our recessionary times, the federal government prints trillions for distribution to failing companies. In return, the benefitting firms shed jobs. For a snapshot of this economic undevelopment, see below:

1. CitiBank slashed 53,000 jobs for $45 billion, plus $306 billion in loan guarantees
2. UBS cut 13,500 positions for $60 billion
3. The Carlyle Group dropped 100 jobs while affiliate Boston Private Financial Holdings netted $153 million

It's a good thing Carlyle didn't get billions in support. Think of all the jobs they could cut in return.

Saturday, December 6, 2008

Private Equity Flush with Uninvested Capital

News reports show plenty of dry powder on the sidelines as taxpayer money rescues failing company after company. The Apollo Group has $20 billion ready to invest. Others include:

Bain Capital $20 billion
TPG $30 billion
Carlyle Group $40 billion
KKR $16 billion

Private equity is stressed from high leverage and investing in Wall Street's innovative products, the ones that burrow deep into a portfolio before exploding. Yet, the similarly stressed individual taxpayer is forced by Congress to fund bailout after bailout.

Carlyle Group affiliate Boston Private Financial Holdings got $153 million in TARP money. BPFH caters to the high net worth marketplace. Thank heaven the rich can get loans on the taxpayer's back. And thank heaven, the PEU boys can sit on billions while our financial system continues imploding. Cake anyone? Or is it tea and crumpets...

Despite Heavy Cash Position, Carlyle Group Stressed

The Carlyle Group is a tale of two companies. Layoffs and office closings greeted Carlyle employees this past week. Yet, the private equity underwriter (PEU) is loaded with $40 billion in cash.

Bloomberg reported on a Standard & Poors study of managed loan funds. It revealed more pain for Carlyle.

Loan funds managed by American International Group Inc., Carlyle Group and KKR Financial Holdings LLC may face downgrades after Standard & Poor’s review of 197 portions of collateralized loan obligations.

“Rapid deterioration in the credit quality of the corporate loans in the underlying collateral pools in recent weeks” led to the move, the New York-based ratings company said today in a statement. The securities, valued at $3.89 billion at issuance, are from 127 CLOs including deals overseen by the three managers, S&P said.

“We will be reviewing the individual investment portfolios of both insurance companies and financial institutions in the upcoming weeks for large exposures to the tranches that are being placed on credit watch,” the report said.

In other words, more dokie is coming in the worldwide economic meltdown. Carlyle has a European Leveraged Finance Team with almost 6 billion Euro's under management. How far will those CELF investments free fall?

Thursday, December 4, 2008

Credit Freeze Approaches Absolute Zero

Despite $7 trillion in approved federal interventions, corporate borrowing remains severely constrained. No high yield corporate bonds were issued in November, a worldwide phenomenon.

Ex-White House economic adviser Al Hubbard predicted TARP passage would ensure a nice outcome. That "happy ending" remains elusive. Mr. Hubbard's sorry track record continues.

Carlyle Group Cuts 10% of Staff, Holds $40 billion in Cash

The Carlyle Group announced a 10% reduction of staff in light of dormant deal making. One hundred employees will get pink slips as Christmas approaches. If a private equity underwriter (PEU) with $40 billion in dry powder can slash employment, what are other companies to do?

I'm surprised David Rubenstein and company didn't hold out. CitiGroup got $45 billion in TARP cash and $300 billion in loan guarantees for shedding 50,000 jobs. Big Three auto companies may get over $30 billion in financing to layoff tens of thousands.

Carlyle got a mere $153 million for affiliate Boston Private Financial Holdings. If Hank Paulson ponied up more green, would the PEU inflict more employee pain? How will layoffs play out? Ex-Clinton staffer and Carlyle spokesman Chris Ullman said the majority of cuts would be in the U.S. Will it impact Lana Axelrod, a health care investment expert in New York? Did huge government consulting firm Booz, Allen & Hamilton advise Rubenstein and company on the cuts? The mood around Carlyle must be blue.

Wednesday, December 3, 2008

Oracle of Pennsylvania Avenue Speaks

Carlyle Group co-founder David Rubenstein mentioned the coming "mother of all stimulus packages" on October 25, long before the media posited such a thing for public consideration. He offered his prediction on Alaskan Public Radio.

The Oracle of 1001 Pennsylvania Avenue delivered again, at the National Press Club. He sees Washington becoming the corporate power center and good times for lobbyists and consultants. Rubenstein also foresees:

1. Unemployment over 10%
2. Recession for another year
3. Hedge funds will lose value
4. Private equity will remain hampered due to lack of leverage
5. Financial engines have dramatically changed & will take years to return
6. Deepest recession since Great Depression

7. President elect Obama will deliver a $1 trillion stimulus package

He didn't say anything about his favorite strategy, buying affiliate debt for pennies on the dollar. Nor did he mention taking credit default swaps on bankrupt holdings. Carlyle has a way to make money in the current difficult environment. They have 30% annual returns to generate.

Tuesday, December 2, 2008

AIG's Distressed Asset Sale of ILFC

The Financial Times reported on the likely sale of AIG's aircraft leasing division, International Lease Finance Corp (ILFC). The Federal Reserve Bank controls 80% of AIG through its $150 billion life support.

ILFC had $9 billion in bank debt and commercial paper mature in 2008. Did the Fed make good on these obligations, or do they pass on to any buyers? Given the locked up credit markets, $9 billion can be hard to come by.

FT believes there to be a small list of potential buyers, the large private equity firms like TPG, KKR and the Carlyle Group. GE was mentioned as they already own portions of aircraft leasing companies.

The economic crisis means any sale would occur in a distressed environment. Assets are likely to be sold at a discount, deeper if the government won't offer sweeteners. One source noted "that the government is extraordinarily exposed through its investment in AIG and is attempting to raise whatever money it can." The piece stated:

The second source said he believed ILFC would be highly leveraged because its assets are strong collateral and can be levered extensively. He said a more likely scenario could include asking the government for some lingering support whereby allowing the buyer to maintain ILFC’s single A rating.

If the government has hopes of securing full value for ILFC, it will have to provide some ongoing support, the same source said. Conversely, if the government does not provide aid to buyers, the company is expected to be sold at a lower price.

Government support, discounted price, equals the opportunity to make 30% annual returns. Could there be more taxpayer funded corporafornication for the Carlyle Group?

Monday, December 1, 2008

Carlyle Group's Hawaiian Telecom Goes Chapter 11

Saddled with over $1 billion in debt, Hawaiian Telecom declared Chapter 11 bankruptcy. The Carlyle Group purchased the company in 2005 for $1.6 billion. It suspended interest payments in November as it negotiated with debt holders. Forbes reported:

"Our decision to restructure through a Chapter 11 filing allows the company to reduce its level of debt and reorganize its business, so we can emerge a stronger and more financially secure company better able to compete in the ever-changing communications industry," President and Chief Executive Eric Yeaman said in a statement.

Apparently Carlyle can buy their affiliate's debt cheaper under a bankruptcy markdown. Did they bet on their affiliate's failure? How many of HT credit default swaps do other Carlyle funds own? An ex-Goldman Sachs executive will handle the legal proceedings for Carlyle.

Saturday, November 29, 2008

Jeb's New Boss?

Lehman Brothers' investment management business had two famous employees when the firm sank beneath the asphalt of Wall Street. President Bush's brother Jeb worked for Lehman's private equity group, while cousin George Herbert Walker was global head of investment management.

Lehman was the fourth-largest investment bank before it filed the biggest bankruptcy in history Sept. 15 with $613 billion in debt. The fire sale price of Lehman's Neuberger Berman investment division was a mere $2.15 billion. That price may not hold with imploding financial markets. Auction bids are due December 1st.

Bain Capital planned to become part owner, but The Carlyle Group challenged the sale. Where will Jeb and George Herbert Walker land for Christmas? Will The Carlyle Group find two more Bushes under their Christmas tree? Stay tuned... (Update: Carlyle did not place a bid)

Thursday, November 27, 2008

Carlyle Group Invests in Recession Proof Chinese Private Education

The Carlyle Group invested $50 million in Hao Yue Education Group, a Chinese for-profit educator. Reuters reported:

The Washington, D.C.-based private equity giant said the investment was funded by the Carlyle Asia Growth Partners Group and would support Beijing-based Hao Yue's plan to boost enrolment through campus expansion and acquisitions of other private vocational schools.

The deal comes after Carlyle, which had $91.5 billion of assets under management committed to 66 funds at the end of September, last year invested $20 million in Topia Education, which runs tutoring institutes in South Korea.

Private equity firms are increasingly investing in the fast-growing private learning sector, betting that the obsession of many Asian parents with their children's education will make it recession-proof.

Will they teach students about producing quality goods and services? America's innovative financial products and Chinese infant formula proved toxic. It's unclear how either market will recover from such poor quality production.

Let's hope Carlyle does better with for-profit education than they did with Carlyle Capital, Blue Wave Partners, SemGroup, and patients in their New Orleans LifeCare Hospital after Hurricane Katrina struck.

Wednesday, November 26, 2008

FDIC Looks to PEU's to Buy Failed Banks?

Bloomberg reported an FDIC decision could open the door for private equity underwriters (PEU's) to buy failed banks. NYT's Dealbook stated:

The Federal Deposit Insurance Corporation is widening its search for buyers of failed banks.

The agency said Wednesday that it would allow qualified parties without bank charters make offers to acquire the deposits and assets of failing institutions. The decision comes a day after the F.D.I.C. reported that bank failures rose 46 percent in the third quarter, to 171.

“The F.D.I.C. is responsible for ensuring that failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund and minimal disruption to the financial system,” the agency said in a statement.

“In order to achieve this result, the F.D.I.C. markets the deposits and assets of a failing institution to known, qualified and interested potential bidders,” it said. “The F.D.I.C. recognizes that investors not organized as an F.D.I.C.-insured depository institution or holding company may potentially be interested in bidding to purchase a failing institution.

Sean Ryan, an analyst at Sterne, Agee & Leach, told Bloomberg that the rule change could encourage private equity firms to buy banks.

The Carlyle Group has a $14 billion fund nearing close. With $1 billion in TARP money, Carlyle could put $15 billion to work buying those banks. Aren't there ownership percentage restrictions? They were recently increased from 28% to 40%. Have they gone higher in all the rescue machinations?

Carlyle Group Raises $14 Billion yet Needs TARP Money

The Carlyle Group raised nearly $14 billion for their latest buyout fund. The Washington based private equity underwriter (PEU) needs another billion or so to close out the offering. Will Hank Paulson provide the final amount from his TARP?

The fund's openness helps explain why $153 million in taxpayer money was needed to boost Carlyle affiliate Boston Private Financial Holdings. The investment firm caters to the "high net worth marketplace". And they need loans, on the taxpayer's back?

Rest assured The Carlyle Group will make out like bandits from the $5-7 trillion financial rescue and the upcoming $500-700 billion stimulus plan. Surely, the taxpayer can do his part to get Carlyle back on track to 30% annual returns.

Monday, November 24, 2008

Greed Killed Investing

CNBC's Rick Santori said the big money boys did their part to create the rotating crisis of confidence in storied financial firms. Big banks and Wall Street firms took turns buying credit "insurance" (credit default swaps) in a weak kneed firm. Subsequently, they shorted the stock. This practice is akin to secretly buying insurance on your neighbor's house and burning it to the ground.

Instead of prosecuting the likes of CitiGroup, Morgan Stanley and Goldman Sachs, Uncle Sam opened up the Treasury vault. Hank Paulson repeatedly puts tens of $ billions of taxpayer money into the pirating entities.

Greed overran the system. Firms jettisoned quality in pursuit of extrinsic motivators. Commissions/fees encouraged realtors to sell homes, mortgage writers to accept almost any applicant with little information, and rating agencies to give investment pigs triple A ratings. Executive incentive compensation encouraged excess leveraging and the packaging/selling of investment junk via derivatives and securitizations.

Derivatives are financial bets on a future event. Credit derivatives were intended to provide peace of mind to a firm's bondholders, only CDS buyers don't have to hold the bond. Accounting rules enabled companies to keep most of their derivative obligations "off balance sheet." This makes it difficult for a shareholder to get an accurate financial picture of the publicly traded company.

The "mark to market" accounting rule was intended to improve financial statement accuracy. It arose in a time of rapidly rising asset values. It required companies to value their financial assets at market value. Financial firms wanted it in a time of rising assets. They could borrow more, keeping the same high relative leverage. The accounting change turned into a razor when assets declined.

Our elected leaders look to stop "mark to market" accounting. They do so to save our imploding financial system. While it may work, Wall Street and big banks killed investing. Balance sheets can longer be trusted.

It takes a long time to build and grow a market. Poor quality can kill it overnight. Ask Johnson & Johnson about their poisoned Tylenol crisis. Imagine if everyone in the acetaminophen retail chain behaved similar to America's storied financial firms. The pain killer would be off the shelf.

J&J did the right thing. Their product is still for sale.

Sunday, November 23, 2008

CitiGrab Goes for Taxpayer's Wallet Again

A capital injection of $25 billion wasn't enough. The promise to jettison 52,000 jobs didn't assuage the market. CitiGroup's stock is in free fall. The diversified financial firm needs $50 billion more.

While Congress turns a blind ear to pleas from jet setting auto execs, CitiGroup only has to return to Hank Paulson's TARP window. Congressional committees berated Big Three CEO's for their inability to adapt to change. The three companies propose to split $25 billion in bridge financing.

Citi may get twice that amount, after ingesting $25 billion last month. That's some burn rate. But wait! Executives say they have a robust capital position. CEO Vikram Pandit told employees the company did not want to change its business model.

Is anyone else confused? Change, won't change? $25 billion here, $50 billion there? If we give CitiGrab $50 billion more, does that mean another 100,000 employees will be laid off?

Saturday, November 22, 2008

Carlyle Group's Next Stop, Libya?

The Jamahiriya News Agency published a curious report on thawing U.S.-Libya relations. They cite a missive from President Bush to Saif al-Islam Muammar al-Gadhafi, the son of Libya's notorious leader. National Security Adviser Stephen Hadley delivered the message, alongside David Welch, Assistant Secretary of State.

The article highlighted a Tuesday evening dinner in honor of Muammar's son. The Carlyle Group hosted the event at the Washington Club. The Libyan reporter butchered the names of influential Reagan officials, but one could deduce James A. Baker, III and Frank Carlucci attended, in addition to the State Department's David Welch.

Saif met with thirty one Senate and House members during his trip. The story ended with:

Former and present US officials welcomed the visit of Saif al-Islam Muammar al-Gadhafi and expressed a keen interest in developing American-Libyan relations.

JANA learned US officials informed Saif al-Islam Muammar al-Gadhafi of the desire of the American side to sign a package of cooperation agreements with Great Jamahiriya in the areas covering prevention of double taxation, ensuring and promoting investment, trade exchange and cultural cooperation.

They also expressed desire to operate direct flights between US and Great Jamahiriya. JANA also learned that meetings of Saif al-Islam Muammar al-Gadhafi with US officials in Washington stressed on the need to facilitate granting entry visa and residency to Libyan students and nationals and easing travel within US airports.

U.S. Corporacrats and their sponsors work to open up Libya to American investment. History shows it will be on their terms. Was that part of Secretary of State Condoleezza Rice's message in their Thursday visit? Or did President Bush relay it in his phone call to the elder Gadhafi last Monday?

Update 3-7-11:  HuffPo reported David Welch left his State Department post in 2009 to take a job with Bechtel, the construction giant which later opened its first office in Libya since the 1960s and helped build a massive power plant east of Tripoli, Libya's capital city. Welch, who is the president of Bechtel's Europe, Africa, East and Southwest Asia region, did not return a request for comment. Yet another glimpse of the Government Corporate Monstrosity (GCM), Eisenhower's MIC on steroids....  

Carlyle's Quarles Votes for Geithner

Randall Quarles gave two thumbs up for President elect Obama's Treasury nominee, Tim Geithner. Quarles is an ex-UnderSecretary of Treasury and heads up The Carlyle Group's financial portfolio. He recently landed $153 million from Hank Paulson's TARP for Boston Private Financial Holdings. The On Wall Street reported:

"He's a very strong choice for some very specific reasons," said Randal Quarles, managing partner of Carlyle Group and a former Treasury undersecretary in the Bush administration. "He has a wealth of experience at the Treasury and Federal Reserve. He's been intimately involved in dealing with the financial crisis. And before the financial crisis he was very thoughtful and involved in trying to reduce some specific risks in the system."

How will Quarles' kind words translate into future capital injections? Will Tim prop up any past deals with taxpayer recapitalization? Will Geithner put up Treasury funds in joint venture deals with Carlyle, sold to the public as "private matching funds"? Stay tuned...

Friday, November 21, 2008

Carlyle Group Looking to Change its Luck

What could be luckier than owning part of The Bank of Ireland? Carlyle, a politically connected private equity underwriter (PEU), is in heated discussions to buy up to 40% of the bank for $2.5 billion. The Irish government already guaranteed bank liabilities of 370 billion pounds.

The Emerald Isle has leprechauns guarding pots of gold at the bottom of rainbows. While the sun isn't shining yet in our global economy, The Carlyle Group sees better days ahead. When the sun comes out, the gold hunt begins. How many little people will be slaughtered in process?

The big money boys don't like a level playing field, as they pursue super profits. Carlyle expects 30% annual returns. The Bank of Ireland can access cheap central bank money. Will they pass that through to Carlyle? Will the PEU gain a captive bank, one that can fund their deals?

Carlyle needs their luck to change after Carlyle Capital Corporation, BlueWave Partners, and SemGroup failed and the Russian firm dropped their $3.5 billion bid for steel maker John Maneely. Will Irish equity improve their luck? It may have turned with $153 million in U.S. taxpayer funded capital for affiliate Boston Private Financial Holdings. Which streak will continue?

Thursday, November 20, 2008

Paulson Speaks from Treasury's Rear Window

Hitchcock like fear is back in a big way on Wall Street. The flight to safety reached the stratosphere as people flocked to low yield Treasury bills. The Dow Industrials tanked 444 points, imploding to levels not seen since Bill Clinton's second term.

Most of the deterioration occurred after Treasury Chief Hank Paulson spoke from the Ronald Reagan Presidential Library. Market stress clearly continues after $4.28 trillion in federal interventions. Credit default swaps for Warren Buffet’s Berkshire Hathaway reached 500. In other words, people are thinking the previously unthinkable. Systemic risk is baaack.

The big money boys still don't trust each other to make good on their debts. Crisis remains on the table. That means more taxpayer funded Corporafornication. It's amazing what they can get away with, especially when the public is scared.

Taxpayer Invests Alongside Cerberus Capital & Carlyle Group

Current Treasury Chief Hank Paulson's sovereign debt fund will buy a piece of two private equity affiliates, GMAC and Boston Private Financial Holdings. GMAC is majority owned by Cerberus Capital Management and lead by ex-Treasury Chief John Snow. The financing firm applied for bank holding company status. That designation enables GMAC to receive Treasury funds via the capital purchase program.

Yesterday, Boston Private Financial Holdings announced approval by for $153 million in taxpayer investment through preferred stock and common stock warrants. BPFH is an affiliate of The Carlyle Group.

Private equity underwriters (PEU's) are rumored to have billions on the sidelines, waiting for values of financial firms to fall. If they have so much money, why is the taxpayer propping up their existing businesses? Are we doing so at below market rates? I think I smell a PEU.

Wednesday, November 19, 2008

Tax Cheating UBS Keeps Spot on Bush's SIPC

Swiss bank UBS illegally helped 19,000 wealthy Americans avoid $2.1 billion in taxes from 2000-2007. In 2005 an internal whistle blower wrote UBS executives and the bank's general counsel about the scheme. The New York Times reported:

Senior executives were alerted at least three years ago to possible violations of securities laws in dealings with American clients of its private bank. The letters cast a spotlight on the senior executives who were copied on them, including Marcel Rohner, who led the bank’s global wealth management unit and has been chief executive since 2007, and Peter Kurer, the bank’s former top lawyer, who is now its chairman.

Who did Marcel and Peter involve in their internal investigation? Did they inform Vice Chair Phil Gramm? Did either ask Mark S. Shelton for assistance?

Mark S. Shelton is managing director and general counsel, Wealth Management US, and co-global general counsel, Global Wealth Management & Business Banking, UBS. He joined UBS in May 2003 and is responsible for over 400 lawyers, compliance officers, and other professionals. The US Legal and Compliance Departments provide advice, surveillance, and training services, and act as control functions, for the Wealth Management businesses located in several broker-dealers, trust companies, UBS AG bank branches, and UBS Bank USA.

Mark S. Shelton was appointed to the Securities Investor Protection Corporation by President George W. Bush in 2007. Today, the President nominated him for reappointment as the Securities Industry Representative. What was Mr. Shelton's role in his firm's widespread tax cheating? Surely for symbolic reasons alone, George W. could have found another guardian.

The SIPC is charged with protecting investors. Their press release states:

The Securities Investor Protection Corporation is the investor's first line of defense in the event a brokerage firm fails owing customers cash and securities that are missing from customer accounts.

Who's looking out for the taxpayer, now a direct investor in financial firms through Hank Paulson's sovereign debt fund? UBS didn't care about wealthy clients paying their legal tax obligations for a seven year period. Why should I trust their representative to look after my interests?

Paulson's Sovereign Debt Fund Invests in Carlyle Group Affiliate

Six weeks after Congress passed the TARP, Treasury Chief Hank Paulson reached a new low in the use of taxpayer money. MarketWatch reported Carlyle affiliate, Boston Private Financial Holdings received approval for a federal equity injection.

The Treasury intends to invest approximately $150 million in Boston Private in the form of preferred stock and common stock warrants.

"We are extremely pleased by the U.S. Treasury Department's preliminary approval of a TARP capital investment in Boston Private," said Timothy Vaill, Chairman and CEO of Boston Private. "It will enhance our already strong capital position and allow us to expand lending programs in each of our markets nationwide, among other things. Along with the $173 million of funds from our highly successful capital raise in July, including a strategic investment by The Carlyle Group, this investment by the Treasury provides further additional flexibility to manage our business in the current market environment."

The Treasury Department's TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

The TARP has been criticized for giving billions to banks, who have yet to increase lending. How will $150 million help Boston Private?

BPFH is a national financial service organization comprised of independently operated affiliates located in key regions of the U.S. that offer private banking, wealth advisory and investment management services to the high net worth marketplace.

Already strong capital position? High net worth marketplace? This is the latest round of Bush sponsored Corporafornication. American taxpayers will soon own a chunk of The Carlyle Group. Will we get the 30% historical returns earned by the private equity underwriter (PEU)? Or are we recapitalizing a rich man financial services firm on the cheap? More details, please....

Monday, November 17, 2008

Great Worldwide Writedown Hits Private Equity

Private equity underwriters (PEU's) continued to shed value on both the debt and equity side. Carlyle Group co-founder David Rubenstein bragged in Hong Kong about his firm's buying back affiliate debt on the cheap. Corporate debt is going for 60 cents on the dollar.

PEU equity is also on sale. Institutional investors, including big endowments and pension funds, are selling their private equity stakes on the secondary market. Bids have come in as low as 50 cents on the dollar.

The great unwinding continues, even as private equity enters its "golden age". But new deals await and Hank Paulson indicated the TARP would look for matching private investment. How long before a Treasury-Carlyle Group deal? Will Olivier Sarkozy and Randall Quarles hit a home run in their first public deal? Stay tuned...

Sunday, November 16, 2008

Hawaiian Telecom: Next Carlyle Group Affiliate to Crater?

Hawaiian Telecom may declare bankruptcy, according to company officials. The Carlyle Group purchased the company from Verizon in 2005. It took on $1 billion in debt to fund the deal, $574.5 million in bank loans and $550 million in floating rate bonds. Hawaiian Telecom delayed $26 million in bond interest payments earlier this month and got a Moody's downgrade to "D". The investment downgrade drives up interest expense in their floating rate bonds.

Other Carlyle affiliates and investment vehicles cratered in 2008. Carlyle Capital Corporation imploded first. Afterwards, Blue Wave Partners disappeared and SemGroup was taken over by creditors. Is Hawaiian Telecom next?

The Carlyle Group is known for their shrewdness. Co-founder David Rubenstein stressed Carlyle's current strategy of buying affiliate's debt back on the cheap. Is the bankruptcy threat part of generating returns for the private equity underwriter's distressed debt fund?

While one arm of the politically connected PEU takes, the other gives. Watch out for sleight of hand! Investors and taxpayers are subject to fleecing. Ask the good folks in Dallas, Texas. They're waiting on thousands of promised new jobs from Carlyle affiliate, Vought Aircraft Industries.

My guess is Vought would pull a Hawaiian Telecom, long before it met promised job increases for $35 million of Texas taxpayer funds. Is a threatened Vought bankruptcy next? How much affiliate debt can Carlyle buy back for pennies on the dollar? About $1.35 billion worth, or more with leverage? Stay tuned...

The Carlyle Group Stamp of Viability

A number of storied Wall Street firms watched their stock prices plummet after getting money from Hank Paulson's Financial Rescue Program (FRP). Ex-Deputy Secretary of the Treasury and Carlyle Group managing Director Randall Quarles spoke to this issue.

“Institutions are realizing that in this environment they do need to anchor confidence, and I don’t think that a TARP capital injection will be found to be a useful anchor of confidence,” Randal Quarles told a gathering of Wall Street executives last week. “I think that people will realize soon enough that the government is simply not set up in such a way that the allocation of TARP capital can be an effective signal of viability or future merit.”

Will direct capital injections morph into indirect ones? Will TARP money pass through an intermediary, one that gives markets more confidence? Would The Carlyle Group like to serve in such a role?

Access to borrowing is severely restricted, at least that's a common theme in a Hong Kong meeting of private equity underwriters (PEU's). Will Carlyle, a politically star studded PEU, use the Treasury window as it's deal funder?

Hank recently hinted at partnering with the private investment community. How might that benefit the Carlyle Group and their Kentucky Derby like stable of political insiders?

The federal government has a $3.8 trillion sovereign debt fund to manage. Our denuded democratic institution contracts out most functions. How might the new federal deficit investment program be managed by the private sector? Will Carlyle get their management fee plus the opportunity to continue their string of 30% annual returns on investments?

I feel another Hank Paulson lurch coming. One thing is clear. The big money boys will benefit.

Saturday, November 15, 2008

Carlyle Infiltrated, Defense Business Board Advises Obama on Pentagon Spending

What luck for The Carlyle Group! They have a representative, Dov Zakheim, on the Defense Business Board advising the President elect on military spending. Carlyle acquired Dov Zakheim's services this past summer when it acquired Booz, Allen, Hamilton, a huge government consulting firm. Dov served as Pentagon Chief Financial Officer for Bush, but prior to that Zakheim contributed to the foundational document for the Project for the New American Century.

Over the last few years Carlyle cut their investments in defense firms, preferring to expand into other areas of the Government-Industrial Monstrosity, Eisenhower's MIC on steroids. But the pie is big, and the private equity underwriter (PEU) has their hands in the Pentagon's pocketbook, primarily through Booz, Allen.

U. S. defense spending has climbed more than 60 percent during the eight years of the Bush administration, and will total at least $612.5 billion in fiscal 2009. This includes $542.5 billion for the core defense budget and an initial allowance of $70 billion for the wars in Iraq and Afghanistan.

Obama has two Carlyle Group employees as bundlers for his record spending political campaign. Now he has a PEU military adviser via the Defense Business Board. The infiltration is deep and air spray alone won't purge our government of the PEU.

Friday, November 14, 2008

Conaway Quiet on Success of TARP, but Effusive about Process

Rep. Mike Conaway, R-TX bragged about America's red and blue political parties coming together to deal with the financial crisis. He failed to say anything about the logic behind the "most significant measure passed by the 110th Congress." Nor did Mike address Treasury Sec. Hank Paulson's trashing the plan he and Fed Chief Ben Bernanke sold to the House.

Yesterday, Hank said "no" to the purchase of toxic assets. preferring direct investment in financial institutions, also known as taxpayer funded recapitalization. So what changed, Representative Conaway? As a CPA, my Congressmen is in a unique position to translate high fa looting financial talk. But the cat got Conaway's tongue, especially on the surprise tax cut the Treasury Chief decreed.

Free wheeling Hank Paulson wants to steer money to nonbank financial institutions, insurance companies and other providers of consumer credit. He plans to buy equity in conjunction with matching private investment. Look for private equity underwriters (PEU's) and sovereign wealth funds (SWF's) to join Treasury in the new program. Will Uncle Sam guarantee the match, as well? Between all the programs, America now runs a huge $3 trillion sovereign debt fund.

While the list of financial firms getting aid expands, American auto makers are reeling. The deepening recession has them on the ropes. Conaway voted for the big money boy bailout bill, but is drawing the line on auto's.

At a time economic stimulation is in order, Mike returned to his conservative roots. He wants lower spending and to reduce the size of government. That could prolong the financial pain.

Mike's correct when he said Republicans lost independents. Hint, we're still confused. Consistent logic or theory is not apparent.

My vote was for honesty. Conaway is yet to earn it, as he nears his third term.

The Carlyle Group's Debt-a-Palooza Takes Advantage of Blue Mood

Carlyle Group co-founder David Rubenstein repeated his mantra of buying back debt on the cheap in Hong Kong. Reuters reported on the latest strategy of private equity underwriters (PEU's):

"When history is recorded, the single best deals done in this environment will probably be deals done about near the bottom for the debt of one's own company," he said at the Asian Venture Capital Journal conference.

Private equity firms were doing a lot of this right now, he said. As a result, the term "private equity" may soon switch to "private credit," as more buyout firms prepare to purchase the cheap debt of companies they have studied in the past.

The question is whether the Fed will serve as the middle man, now that Hank Paulson's TARP is a pure investment program. Hank's taxpayer funded, sovereign debt fund could clear the decks of struggling financial institutions. How would the average citizen feel about billions in taxpayer money used to clear credit decks on the cheap for PEU's?

The good news is banks will lend to PEU's, at least on a limited basis. The article reported:

With debt consistently traded at 60 cents on the dollar, companies should buy it back, holding it until the turmoil clears and selling it later for a premium. Banks are even allowing debt buyers to borrow money from them for these purchases.

David Rubenstein knows how to make big money off the Financial Rescue Program (FRP). In good times and bad, the Bush administration knows how to deliver Corporafornication. The Carlyle Group enjoyed a wonderful eight year ride.

Unfortunately, they're well positioned for that to continue. A few of their boys on the blue team: McLarty, Marchick, Bayh, Emanuel, Kennard & Rossotti. Suit up! The game is on...

Thursday, November 13, 2008

Al Gore Green PEU

Al Gore expressed no interest in serving in an Obama administration, despite thoughtful proposals as to his role. The elder statesman read the tea leaves and decided considerably more green lay outside the confines of our federal bureaucracy. Vice President Gore's environmental credentials are clear from his Nobel Peace prize and his successful movie, An Inconvenient Truth. Later studies revealed Gore exaggerated sea level rise. A British judge ruled the film had nine errors but found the film "broadly accurate."

Albert has a financial incentive to drive green changes. He is Chairman of London based Generation Investment Management and a partner with Kleiner Perkins Caufield & Byers, a private equity underwriter (PEU).

In March the International Herald Tribune reported on Al's investment fundraising skills.

The sustainable investment firm run by Al Gore, the former U.S. vice-president, is about to be closed to new investors, having raised close to its $5 billion target. Generation Investment Management will probably restrict inflows into its main Global Equity Fund next month, Gore and David Blood, co-founder of the company, said at a news conference Tuesday. Blood said the firm could not manage more than $5 billion in assets.

Gore serves on KPCB's GreenTech initiative. Information on their fundraising effort comes from a May press release:

Kleiner Perkins Caufield & Byers (KPCB), the Silicon Valley venture capital firm, announced today it is launching a new $500 million investment vehicle: the Green Growth Fund. The fund is intended to help speed mass market adoption of solutions to the world’s climate crisis.

KPCB separately announced today the formation of KPCB XIII, a $700 million fund that will invest in greentech, information technology and life sciences ventures. Within the greentech sector, KPCB XIII will mainly back early-stage entrepreneurs, while the Green Growth Fund will support companies that have already entered their growth phase.

Within months, Al Gore raised more than $5.5 billion for investors to profit from green commercial development. Ironically, Generation Investment Management and KCBP joined forces last year. Fortune highlighted Al Gore's association with the two firms. But, to Al's credit:

Mr. Gore also announced that as part of the agreement between the two firms, 100 percent of his salary as a Partner at KPCB will be donated directly to the Alliance for Climate Protection—the non-partisan foundation he chairs that focuses on accelerating policy solutions to the climate crisis.

Al also serves on the Apple Board of Directors and advises Google. Gore knows when to be quiet, a skill needed in today's political landscape. Do his private equity firms expect 30% annual returns like standard setting Carlyle Group? If so, the taxpayer pays for egregious returns. Our green becomes Al's green.

What happens if the partnership of Blood & Gore is prophetic? How high will the financial blood get in the streets as old energy battles new energy? Will the red or blue franchise win? Stay tuned...

Update: Katie Couric interviewed Al Gore, calling him the "Godfather of Green." He discussed his upcoming book on climate solutions. How many arose from his financial investments in Camco (carbon projects), Ausra (solar energy), Ocado (green grocery), New Forests (green investment management), Silver Spring Networks (smart electricity) or New Resource Bank (green banking)? Al didn't disclose.