Thursday, July 31, 2008

ExxonMobile: Profit King of the World!

Executives at ExxonMobile supremely weathered Americans cutting their driving 1.8% in April and 3.7% in May. They announced, yet again, record profits of $11.97 billion, up 17% from last year. A special charge related to the Supreme Court Exxon Valdez decision reduced their profit a mere $290 million for the quarter.

While the Bush administration bores in the American psyche to open up more areas for drilling, big oil continues raking in three year record profits.

Royal Dutch Shell put $11.56 billion in their tank, up 33% from a year ago

BP's second quarter profit soared 27% in 90 days, to almost $9.5 billion.

ConocoPhillips bottom line raced almost 31% from last quarter, to $5.44 billion

The most profitable company in the world, ExxonMobile, survived angry customers cutting back mileage (by some 40 billion). Clearly, customer satisfaction takes a back seat to profit and executive incentive compensation. It's called capitalism.

Angry customers are also upset voters. Will they watch politicians' current push for more giveaways to big oil? Three years ago, Congress and the White House provided $6 billion in subsidies via the 2005 Energy Bill. Pay attention, people. America, the ideal, is truly at risk.

Wednesday, July 30, 2008

Is Bennigan's the Economic Canary in the Coal Mine?

The Dallas Morning News reported on the abrupt closing of company owned Bennigan's and Steak & Ale restaurants. The article stated:

S&A Restaurant Corp., a subsidiary of Plano-based Metromedia Restaurant Group, has filed for Chapter 7 bankruptcy protection, the company said in an e-mail Tuesday. S&A operated the Steak & Ale, Bennigan's and The Tavern restaurants.

A Chapter 7 filing means all assets are to be sold off to pay creditors and the company will close – a move that shocked even insiders aware of the parent company's financial woes.

"I was blindsided by the Chapter 7," said Larry Briski, president of the Bennigan's Franchise Operators Association

Might the closing of these company owned restaurant chains be the economic canary in the American coal mine? More information could shed light on this question, but as usual, they aren't talking.

Metromedia did not provide details on what drove it to pull the plug on its brands.

Hot an saucy has a brand new meaning.

Tuesday, July 29, 2008

BP Stands for Bully the Purchaser and Banner Profits!

In the second quarter Americans opened their pocketbooks wide every time they filled their gas tank. British Petroleum joined ConocoPhillips in announcing record revenues and record profits. ExxonMobile and Chevron share their windfalls later this week.

Smart Senators would be wise to cease and desist promoting oil company interests, especially during this period of "shaft the customer" record earnings. In 3 short months:

BP's second quarter profit soared 27% to almost $9.5 billion.

ConocoPhillips bottom line raced almost 31% to $5.4 billion

Who's celebrating these developments? Not many people I know. Chuck the oil fompany executives and their Congressional facilitators!

ManorCare: Carlyle's Christmas Gift Exchange

After The Carlyle Group failed 24 long term acute care patients in their New Orleans LifeCare affiliate, I thought some regulator or elected official would explore this blot as Carlyle pursued giant nursing home provider, ManorCare. Surely, some heroic leader would ask how the huge private equity firm planned to keep patients safe, should a future disaster occur. It didn't happen. Why not?

The Carlyle Group greased the skids with political donations and lobbyist guns. They hired Dutko Worldwide to market the HCR ManorCare deal. In one month they spent $60,000 to push the acquisition. As lobbyists, Carter Esham, Laine Gussom and Judy Lemons provided therapy to the challenged purchase.

Yes, that seems like small change given Carlyle's expenditure of $280,000 on Ogilvy Government Relations' Federalist Group, intended to influence Defense Department subcontracting and prevent repatriation of the capital gains tax (or changes to their preferred "carried interest" taxation.) But there's more. ManorCare spent $94,500 on lobbying activities in 2007. Did they put in a good word for the proposed sale while they met with Congressional leaders on Medicare, tort reform, and pay for performance?

HCR ManorCare provided some straight up juice in the form of $52,500 in campaign contributions to key members of the House Ways & Means Committee.

Charles B. Rangel, D-NY Chairman $10,000
John Lewis, D-GA $5,000
Xavier Becerra, D-CA $2,000
Earl Pomeroy, D-ND $1,500
Stephanie Tubbs Jones, D-OH $9,000
Mike Thompson, D-CA $1,000
John B. Larson, D-CT $1,000
Ron Kind, D-WI $2,000
Chris Van Hollen, D-MD $10,000
Kendrick B. Meek, D-FL $2,500
Allyson Y. Schwartz, D-PA $2,000

Dave Camp, R-MI $3,500
Paul Ryan, R-WI $1,500
Jon Porter, R-NV $2,500

The company donated to House leaders in both parties:

Steny Hoyer (D-MD) $2,500
Roy Blount (R-MO) $2,000

The present showcase has $60,000 in Carlyle lobbying, almost the same amount in campaign donations to one House Committee from ManorCare, and some $95,000 in company lobbying. That's over $200,000 washing around, apparently enough to remove the stain of 24 patient deaths in a Carlyle owned health care affiliate.

The White House performed similar work by omitting any mention of LifeCare, Memorial Hospital, or their corporate owners in their Lessons Learned report on Hurricane Katrina. It appears Congress is capable of the same. Report author, Frances Townsend, didn't need to be afraid of a subpoena after all!

But how did the story end? Carlyle got their Christmas present, Santa Bush got his milk and cookies and all were happy. Don't you love a good ending?

Monday, July 28, 2008

Gas Prices: Big Oil Profits Soar, while Transportation Dept. Revenue Drops

The Wall Street Journal reported on shrinking federal receipts as a result of Americans cutting back driving by some 40 billion miles in 2008. It made no mention of ConocoPhillips' recently announced record revenues and profits, but then neither did the company. Big oil hired high dollar word merchants to craft their quarterly profit news releases. In an "I feel your pain" move, they showed the strain of $140 a barrel oil on their operations, while avoiding the record nature of their bottom line altogether.

Americans cut their driving by 1.8% in April and 3.7% in May relative to last year. While demand dropped, what happened to gas prices? They rose some 20% over the same period. Huh? What happened to the relationship between demand and prices? Demand fell while prices skyrocketed?

The federal government's take per gallon is fixed. The Journal pointed out the Transportation Department isn't in a position to increase margins while demand declines. Thus, fewer tax dollars are available to replace America's aging transportation infrastructure. It stated:

"... it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated."

They baited the hook, now it's time for the big jerk.

The prospect of the highway fund running a big deficit has sparked a frenzy of lobbying on Capitol Hill, as business groups, ranging from the U.S. Chamber of Commerce to the National Stone, Sand & Gravel Association, have pressed lawmakers for a quick solution.

"We're going to spend a lot of time, money and effort on this," said U.S. Chamber of Commerce President Tom Donohue. "People need to understand that this infrastructure thing is not optional."

The U.S. Chamber of Commerce is known for at least two things, besides wanting private industry to replace public infrastructure. One, they want that expensive and pesky health insurance benefit to go away and both political parties facilitate the transfer of responsibility to the individual employee. And two, the Chamber is advised by ex-White House insider Frances Townsend, a friend of private equity underwriter (PEU), the Carlyle Group.

How is the Transportation Department doing under the prospect of less money? It's greasing the skids for their already in place plans to farm out infrastructure to private entities.

Transportation Secretary Mary Peters said administration officials are crafting an overhaul plan aimed at shaping the debate. The goal would be to give states more flexibility to set transportation spending, while making it easier for them to tap private-sector dollars. Also under consideration: asking Congress to loosen restrictions on states levying new tolls on interstate highways.

Despite Mary's over twenty years working for state and federal DOT's, she has "zero confidence that if we send more money to Washington we’ll get any better results back.” That's quite a revelation. I expected after twenty years, Mrs. Peters would know how to spend money effectively.

Also, recall that people are driving less, which translates into fewer drivers paying tolls. That means government will have to sweeten those deals to guarantee low risk 15% annual returns for PEU's. And don't forget the EPA pushing privatization of water deals, funded by "private activity bonds" and "water enterprise bonds". They were live on CSPAN2 today!

SemGroup, Another Carlyle Affiliate, Declares Bankruptcy

The private equity firm that wants to save America's failing banks had another internal failure. Months after the collapse of Carlyle Capital Corporation, another Carlyle affiliate declared bankruptcy. SemGroup filed for Chapter 11 on July 22nd. Oddly, SemGroup's press release mentioned no causes for the current action.

Company statements cite corporate cousins not impacted by the filing. They include other profitable divisions in the U.S. as well as international entities. Their byzantine organizational structure makes it difficult to understand the relationships between SemGroup affiliated corporations, but ownership of the parent is clear. Carlyle Group and Riverstone Holdings has a 29.3% stake in SemGroup, while hedge fund Ritchie Capital Management owns a 25.2% stake. SemGroup's management owns 30.5%. Other investors control the remaining 15%.

Seeking Alpha spoke to the events driving bankruptcy.

According to SemGroup's bankruptcy-court filings, the company found itself without enough cash to cover margin calls and on July 16 handed its trading account with the New York Mercantile Exchange to Barclays PLC, a move that forced SemGroup to recognize losses exceeding $2.4 billion. A Barclays spokesman declined to comment. Another $850 million of unrealized losses were incurred through over the counter trading, documents show.

Reuters reported the loss to be larger.

The Tulsa, Oklahoma-based company filed for bankruptcy on Tuesday after suffering $3.2 billion in losses on energy futures and derivatives trades that SemGroup says were designed to protect its physical oil trading business. SemGroup creditors said this week they had little idea of the extent of the firm's losses and were surprised by the much larger than expected size of the hedging program.

In February SemGroup offered shares to limited partners at $23.90 per unit. The prospectus remarked on the company's stable, predictable revenue streams (page 74). Not one time was the word "hedging" or "speculating" used in the over 200 page document.

A July 24th SEC filing gives a bit more information on the situation. It mentions two investor class action lawsuits filed against the company. The 8-K states:

Plaintiffs’ specific allegations include that, despite an obligation to do so, the Defendants failed to disclose between February 20, 2008 and May 8, 2008 that Parent was engaged in high-risk crude oil hedging transactions that could affect its ability to continue as a going concern or that Parent was suffering from liquidity problems.

On July 23, 2008, the Partnership and the General Partner each received Grand Jury subpoenas from the United States Attorney’s Office in Oklahoma City, Oklahoma, requiring, among other things, that the Partnership and the General Partner produce financial and other records related to the Partnership’s July 17, 2008 press release.

One creditor was taken aback by the failure. "These guys were supposed to be the straight arrows. They had smart, veteran traders and everyone is shocked by what has happened," said one source close to the bank lending group.

While The Carlyle Group was the second largest investor in SemGroup, it seems their reputation has taken another hit. What strings will they pull to keep their good name? Stay tuned!

Update 8-25-11:  SemGroup's energy trading was at the same level as Merrill Lynch

Saturday, July 26, 2008

PEU's Want to Save Banks While Profiting Handsomely

"The flavor of the day is buying your own debt at below face value. I'm buying bank debt in my deal with leverage from the bank that made me that deal"--David Rubenstein in Forbes, May 2008

Not only is the co-founder of private equity underwriter (PEU), The Carlyle Group, buying back bank debt on the cheap, the magnanimous leader wants his firm to save those same struggling banks. Two Carlyle employees, Olivier Sarkozy and Randall Quarles, wrote an op-ed for the Wall Street Journal recommending private equity come to the rescue of failing banks. (Olivier is the step brother of French President Nicholas Sarkozy, who's concerned about "injecting more ethics into financial capitalism," at least that's what he told Barack Obama. Randall Quarles is an ex-high up in the Treasury Department.)

Leverage, $30 of debt per $1 of equity, is what sent Carlyle Capital Corporation crashing down just months ago. It's what contributed to the current credit crisis. Individuals and corporations borrowed at rates, their ability to pay predicated on the economic balloon's continued expansion. When the helium stopped flowing, much "credit owed" became "credit defaulted."

As David Rubenstein flies in to pick over the carcass of his own PEU's debt, he dangles the hope of bank rescue from Carlyle's deep pockets and the overflowing coffers of partner sovereign wealth funds. The price of a PEU bailout is decreased bank regulation, federally guaranteed debt repayment, and/or huge ownership chunks of the rescued institution.

Carlyle doesn't work for free and fellow co-founder William Conway "doesn't like a level playing field." It's the big boys game and clearly stacked in their favor. How many individuals are offered the chance to buy back their mortgage on the cheap?

Friday, July 25, 2008

Bush Administration's Definition of "Small" Business

The Small Business Administration came under fire for exposing the agency to widespread fraud and awarding billions in contracts to large, well known corporations. Consider a partial list of firms getting small business money from the Bush adminstration:

Home Depot
John Deere
Waste Management
Booz Allen Hamilton
Sprint Communications Company
Perot Systems Government Services
Hewlett Packard Co.

The news article in AllBusiness, a Dun & Bradstreet Company, stated:

In response to the Interior Department report, the American Small Business League (ASBL) reviewed the top 100 recipients of DOI small business contracts for FY2006 and FY2007. It examination was based on data collected by, which has direct access to federal contract information. ASBL Founder and President Lloyd Chapman has been a longtime critic of lax SBA contracting oversight.

The ASBL said it found that 22 large firms -- mostly Fortune 500 companies -- had received more than $200 million in federal small business contracts in 2006. The following year, 28 large firms received more than $230 million in small business contracts. The awards constituted 26.55 percent of all contract actions awarded to the top 100 for 2007, it noted.

NRCC's Loss Improves CFO's Curb Appeal

The National Republican Congressional Committee lost $500,000 to sticky fingers within the organization. Ex-CFO Chris Ward diverted funds from the NRCC to the President's Dinner Committee to his personal bank account. A Washington Times piece said:

"According to NRCC, there was no apparent legitimate reason for the numerous large withdrawals or transfers of funds from the yearly President's Dinner Committee Wachovia accounts to accounts held by Ward," states a court document signed by U.S. Attorney Jeffrey A. Taylor and Assistant U.S. Attorneys Diane G. Lucas and William R. Cowden.

How did Rep. Mike Conaway, a certified public accountant, miss this red flag? How did NRCC internal controls allow numerous large withdrawals or fund transfers for "no apparent legitimate reason"? How many occurred in 2007, the year hero Mike was appointed as Chair of the Audit Committee?

From his personal account, Chris went shopping. The article reported on the many uses of contributor's money.

From 2003 to last year, Mr. Ward made more than a half-million dollars in unauthorized withdrawals from the Republican accounts.

According to the U.S. Attorney's Office, more than $150,000 went to pay "design/remodeling and landscaping companies," with payments closely preceded by deposits from the yearly President's Dinner Committee account to Mr. Ward's own bank account. Prosecutors said some of the money also went to pay for cabinetry and counter top work.

Authorities are also investigating whether NRCC funds were used by Mr. Ward to make mortgage payments totaling up to $72,000, according to the federal complaint.

Federal authorities are seeking to claim Mr. Ward's Bethesda, Maryland home. It looks like the usual free pass for NRCC Board members. Their incompetence allowed a five year siphoning of cash from the accounts of the nonprofit organization. Recall, these are the people who run our country!

Rich American Tax Cheats Fractal at 18,000

It seems tax cheats like to congregate in large numbers, approximately 18,000. Whether individuals or corporations, the magic number repeated itself in two reports. A magic initial could also be found, the letter "U".

UBS, the huge Swiss bank, helped 18,000 Americans avoid paying taxes.

Upland House, a building in the Cayman Islands, houses 18,000 offshore corporations.

WebCPA reported, "Finding these tax cheats is a bit like a game of cat and mouse," said ranking member Chuck Grassley, R-Iowa, in his opening statement. "Only the mouse is hiding its cheese offshore. The IRS needs to be able to stay ahead of the schemers who hide their income offshore. Congress needs to continue giving the IRS more tools to trap the tax cheats."

Thursday, July 24, 2008

Exxon Begs Supremes for Greater Valdez Gifts

Fresh off a Supreme Court decision that knocked $4.5 billion off the original punitive damage award for splashing 11 million barrels of oil along the Alaskan seashore, Exxon wants more savings. The high court ruling didn't address the payment of interest on the $507.5 million damage award. At issue is whether the company pays interest back to the 1996 date of the first court judgement, or to the recent Supreme Court decision, handed down weeks ago. The spill occurred in 1989. Consider Exxon's bottom line, beginning a decade after the spill:

1999 $ 7.9 billion
2000 $17.7 billion
2001 $15.3 billion
2002 $11.5 billion
2003 $21.5 billion
2004 $25.3 billion
2005 $36.1 billion
2006 $39.5 billion
2007 $40.6 billion

Total $215.4 billion

Exxon wants to pay just one month's interest on the $507.5 million, a mere $2.5 million (at 5.9%). This paltry sum brings to mind the size of the Grinch's heart. Those poor people in Whoville, otherwise known as Valdez, Alaska.

Pentagon Audit Intimidation Under Dov Zakheim's Tenure

The Washington Post reported on a General Accounting Office (GAO) study of Pentagon contract auditing. It stated:

Auditors at a Pentagon oversight agency were pressured by supervisors to skew their reports on major defense contractors to make them look more favorable instead of exposing wrongdoing and charges of overbilling.

The Defense Contract Audit Agency, which oversees contractors for the Defense Department, "improperly influenced the audit scope, conclusions and opinions" of reviews of contractor performance, the GAO said, creating a "serious independence issue."

The International Herald Tribune reported on the same story:

In 2002, DCAA auditors allegedly made an upfront agreement with a "major aerospace company" to limit the scope of a review of the contractor's estimate system. When the audit still uncovered problems, the contractor complained, prompting the removal of one auditor working on the case and job threats against another. A final report was then drafted labeling the contractor's work as adequate, the GAO found.

Guess who oversaw all aspects of Pentagon auditing for part of the period in question? It would be President Bush's recent appointment to the Wartime Contracting Commission, Dov S. Zakheim. Consider what Dov says in his bio about his former Pentagon responsibilities:

From 2001 to April 2004 he served as the Under Secretary of Defense (Comptroller) and Chief Financial Officer for the Department of Defense, acting as the Secretary of Defense’s principal advisor on financial and budgetary matters, developing and managing the world’s largest budgets, overseeing all aspects of the Department’s accounting and auditing systems, and negotiating five major defense agreements with US allies and partners.

Dov currently works for huge government consultant, Booz, Allen & Hamilton. He specializes in the defense arena. Which skill does he display more frequently, using his connections to get clients highly profitable business from Uncle Sam or stifling investigations of any potential wrongdoing? Clearly, Dov is talented in both arenas. The Carlyle Group, equally mendacious, will find out soon. The closing date for Carlyle's purchase of Booz, Allen's government division can't be that far away. Might it hinge on a credible investigation? Nah!!!

America's Super Wealthy Tax Cheats & Politics

Some 18,000 Americans used accounts at Swiss banking giant UBS to avoid paying taxes. A former UBS employee, Bradley Birkenfeld, admitted during a separate criminal case in the U.S. to assisting tax evasion while at the bank. So what does this have to do with politics?

First, the super wealthy fund much of America's political apparatus. Who's on the list of 18,000? How many are critical supporters of U.S. lawmakers and their money addicted political parties?

Second, Vice Chair of UBS Warburg is the infamous Phil Gramm, recently known for calling his fellow citizens "whiners". If you want to hear whining, wait until the release of those 18,000 names draws near. Might John McCain, or his wealthy wife, have used some of that tax free UBS advice? If John believes Phil is an economic genius, he could put his money where his mouth is and invested with UBS, now known as "You & (a tax free)U.S.". Is this the reason for Phil's encore departure from the McCain campaign?

Third, America is mad as Switzerland for inking a huge gas deal with Iran. You don't think we're only the world's military bully, do you? We can play economic hardball as well. The Swiss State Secretary for Foreign Affairs recently visited our fair country. He talked about the UBS investigation and met with leaders from both presidential camps. In the blue corner stood Robert Gelbard, while wearing red was Richard Armitage.

Richard Armitage? Isn't he the one who threatened to bomb Pakistan back to the Stone Age and revealed a covert CIA agent's name? Yes, now Richard works on the McCain campaign, next to ex-co-chair Phil Gramm. What better guy to threaten Switzerland should they release the names of any high dollar Republicans, donors or otherwise!

I can see Richard, after a particularly satisfying ConocoPhillips board meeting, accidentally revealing the names of high dollar Democratic donors. It would be a rabbit trail for reporters to take, just before ConocoPhillips shared their record, record, record revenues and profits. Oh, the fun that awaits us! (Update: The New York Attorney General sued UBS on another matter of deception)

Wednesday, July 23, 2008

ConocoPhillips Quietly Explores Record Quarterly Profits

High oil prices boosted ConocoPhillips' bottom line for the second quarter. They netted $5.44 billion, beating estimates by over $1 billion. Funny, their news release said nothing about the record quarter in terms of profit. It was full of pain over the negative impact of high oil prices on refining operations and problems the company has with production volumes. One might expect a New York Stock Exchange firm to crow loudly over record revenues and profits, but nary a cackle.

They did offer a peep on oil exploration expenses. Recall the big oil execs telling Congressional committees about the money they're pouring into exploration? ConocoPhillips spent $288 million on exploration, a mere 5.3% of profit and 0.4% of revenues. Instead, the company spent $2.5 billion to buy back shares and $700 million on dividends to shareholders.

Wall Street Partying 1929 Style

As our National CEO noted, "Wall Street got drunk". President George W. Bush didn't highlight his and Congress' role as bartender via the 2005 Bankruptcy Bill,. The White House stated, "These commonsense reforms will make the system stronger and better so that more Americans - especially lower-income Americans - have greater access to credit." Never mind, that government abandoned its historical role as financial cop.

But one man's misfortune is another's opportunity, as noted by the Wall Street Journal.

The richest 1% of Americans in 2006 garnered the highest share of the nation's adjusted gross income for two decades, and possibly the highest since 1929, according to Internal Revenue Service data. Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years.

No surprise that a politically connected private equity underwriter (PEU) read the signs and invested strategically to serve the super wealthy. MarketWatch announced The Carlyle Group invested $75 million in Boston Private Financial Holdings. The piece offered a description of Carlyle's latest investment.

Boston Private Wealth Management Group 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, selected businesses and institutions.

So, one might expect change? Hardly, the Bush team wants "hair of the dog that bit them" to cure the hangover. More deregulation is the shot. The Federal Reserve Bank met with members of the aforementioned Carlyle Group to discuss lowering bank requirements such that private equity and their foreign government controlled investment partners can shore up U.S. banks.

The system remains firmly in control of leaders drunk on power and money. The bar's still open and the cops are fast friends of the abusers. It's not a pretty picture, unless you like greed enablers and their concomitant dysfunction.

Tuesday, July 22, 2008

"Wall Street Got Drunk" Says Bush

"It (the economy) is uncertain, there’s no question about it. Wall Street got drunk, it got drunk, (it’s one of the reasons I asked you to turn off your TV cameras.) It got drunk and now it’s got a hangover. The question is how long will it sober up, and not try to do all these fancy financial instruments."--President George W. Bush at a closed fundraiser

Does anyone else wonder, where were the financial cops while Wall Street drank and sold? In this case, Congress, the White House and financial regulators let big investment houses and private equity underwriters (PEU's) get stinking drunk packaging complex financial instruments as Triple A rated, also known as putting lipstick on a pig. Then the PEU boys raced to write down their investments. The Carlyle Group wrote Carlyle Capital Corporation down to bankruptcy.

Guess what Bush's answer is to this transgression? He wants the Federal Reserve Bank to allow similarly unregulated private equity underwriters and their partners, sovereign wealth funds (flush with your gas money), to save ailing banks. He wants to play corporate socialist, pumping up Freddie Mac and Fannie Mae after saving Bear Sterns. With all those federal billions in corporate welfare, the pressure grows on Social Security, Medicare and Medicaid.

Guess who continues innovating with PhD level complex financial instruments, doing so free from oversight? The same hungover Wall Street boys cited by the dry drunk in chief. I'm sure we all feel better. Greed obviously isn't good...

Monday, July 21, 2008

Pete Peterson's Billion $ Foundation to Anchor Second Great Guilded Age

Warren Buffet previewed his peer's magnanimous $1 billion donation in late June. Bloomberg reported the Oracle of Omaha saying:

"I know of one fellow that's just been involved in a public offering. I think he's going to be setting up a billion-dollar foundation.''

Buffett may have been referring to Peter G. Peterson, a co- founder of Blackstone Group LP, the New York-based private-equity firm that raised $4.13 billion in an initial public offering last week. Peterson, 81, plans to donate a ``substantial amount'' of the cash and stock he gets from the IPO to ``various charities,'' according to a June 21 filing by Blackstone with the U.S. Securities and Exchange Commission.

The Peter G. Peterson Foundation, founded earlier this year by the senior chairman of The Blackstone Group, is dedicated to increasing public awareness of the nature and urgency of several key challenges threatening America's future, and to accelerating action on them. One of their first grants went to Public Agenda to the Students Face Up to the Nation's Finances initiative. The $500,000 grant will help Public Agenda refine and disseminate a package of learning materials designed to raise college students' awareness of our national fiscal challenges and engage college students across the nation in a discussion of the solutions.

This all sounds wonderful and important, so why blog about it? Pete Peterson is a key player in America's government industrial monstrosity (Eisenhower's military-industrial complex on steroids). He benefits mightily from Uncle Sam's preferred taxation on private equity underwriters (PEU's).

Mr. Peterson served as head of the Department of Commerce under President Richard M. Nixon. He helped open up China as America's trading partner. In May 2007 China returned the favor, purchasing a $3 billion equity stake in the Blackstone Group. As founder and chair, Pete likely got a big chunk of the proceeds for a mere 10% of the company.

Fast forward to Blackstone's $4.1 billion independent public offering, which got placed at $31 a share. The top two leaders, Peterson and Steven Schwarzman pocketed $2.6 billion in that transaction. Shareholders haven't fared as well as the PEU boys. The stock trades at $17.25, a 45% haircut (investment loss).

What does this have to do with Pete Peterson's foundation? Other than allowing Social Security to garner those kinds of investment losses, he's worried about the government's financial troubles. Yet, Pete and his partner pay preferred, as in lower, taxes on their billion dollar proceeds. Of the $7.1 billion proceeds, the total from the $3 billion China deal and the $4.1 billion IPO, Peterson and Schwarzman grossed $4.5 billion. Taxes on "carried interest"are 15% vs. the top income tax rate of 34%. How much did these guys save, or deny the federal government currently in dire finances?

At a 15% tax rate, a $4.5 billion profit adds $675 million to the federal Treasury. At 34%, Uncle Sam would garner $1.53 billion. By not paying their fair share, the PEU boys short the already hurting federal government by $855 million.

Do you think this material will make Public Agenda's curriculum? Not if they want another $500,000 grant from the Peter G. Peterson Foundation. Welcome to the Second Great Guilded Age! We'll see if Pete's prediction comes true. "If Americans are told the truth, and if they feel the required sacrifices for our common future are fairly shared, I have enormous faith that they will respond with a commitment to identify and implement the right solutions," Mr. Peterson said. Start sharing fairly, a truly honorable man would do so...

Saturday, July 19, 2008

Carlyle Group Spanks Another Double on Sonitrol Sale

The Carlyle Group, a huge politically connected private equity underwriter (PEU), sold yet another affiliate for more than twice the original purchase price. Carlyle and two other firms purchased Sonitrol, a commercial security company, for $125.5 million in March 2004. They announced the sale to Stanley Works for $276 million, roughly netting a $150 million profit. A 120% return in 4 years falls within Carlyle's expected range.

Carlyle investors continue to reap savings from the Bush tax cuts, 15% vs. 20% capital gains, and the PEU boys still get their income taxed at a preferred 15%, thanks to "carried interest". With Carlyle's take approximately 20%, let's examine Uncle Sam's gifts to the wealthy:

Capital gains savings ($120 million x 5%) equals $6 million.
Carried interest lollapalooza ($30 million x 19%) totals %5.7 million

George W. Bush and the U.S. Congress enabled Carlyle investors and employees to pocket an extra $12 million on the Sonitrol deal. They plan on using these proceeds to buy American roads, bridges, water and sewage systems. Or they might use the proceeds to bribe politicians for the business.

Politicians and business leaders greasing each other's palms? It's known as a general capitalistic tendency. That and lawsuits involving franchises. Sonitrol franchisees have lawsuits against their owners, while Dunkin Brands entertains a suellapalooza against their franchises. So much for Carlyle's stellar reputation as an operator. But they can sell the hell out of something.

Friday, July 18, 2008

Obama Might Be a Socialist, But Bush Favors Selling Out to Socialists

The Wall Street Journal reported on the exchange between Republican Presidential hopeful during a town hall meeting. In it, Senator McCain derided Senator Obama's voting record before saying he "didn't know" if his peer was a socialist.

One definition of socialism states: “A political theory advocating state ownership of industry, an economic system based on state ownership of capital.”

It turns out Bush’s Federal Reserve Bank is socialist using these criteria, but John McCain gives Ben Bernake a free pass. Other than the obvious Bear Sterns bailout, how might the Fed be socialist?

Consider this the next time you pull up at the gas pump. Saudi Arabia and the United Arab Emirates profusely thank you for enriching their state owned companies. The coffers of these sovereign wealth funds overflow so much, they’re buying chunks of U.S. corporations and key infrastructure assets.

Ben Bernake contemplates allowing SWF’s and their private equity partners to bail out ailing banks. The future could find you financing your gas purchase with revolving bank credit card debt, giving those foreign government owned corporations a double shot at profiting. That socialism John McCain won’t mention. But Barack Obama could be a socialist!

Thursday, July 17, 2008

What Carlyle Does When No One's Watching?

Lou Gertsner, Chairman of The Carlyle Group, gave five tips on leadership from the Yale CEO summit in New York. Mr. Gertsner received a Legend in Leadership award during last month's meeting. In his address he offered his one handed tips. He offered the following when he reached his middle finger:

"It's all about culture. You have to transform the culture, not just the strategy. Culture is what people do when no one's watching."

Lou's third point hit me hard, especially given Carlyle's actions when barely anyone was watching. Consider the following:

Boeing booted Vought Aircraft Industries from a critical joint venture. The JV failed to ramp up key airframe assembly production lines due to "an internal liquidity crisis." It happened while Carlyle raised investment funds by leaps and bounds, also known as billions. The private equity underwriter passed off Boeing's dismissal for dismal performance as a "pure financial transaction," when they were fired for poor performance.

No one watched as Carlyle unloaded two U.S. aircraft operations companies to Dubai Aerospace. The media gave the PEU a free pass for the sale of Landmark Aviation and Standard Aero, which closed between the Dubai Ports World brouhaha and the NASDAQ-Dubai Bourse outrage. Nary a peep on the sale of over 50 domestic airport operations in the mainstream media. One of the divisions, Landmark Aviation, had been rumored to supply terrorist rendition flights.

It wasn't the first failure of business reporters to make connections to Carlyle and disturbing events from a corporate entity. LifeCare Hospitals lost 24 patients after Hurricane Katrina side wiped New Orleans. While numerous reports ran on possible euthanasia of acutely ill patients, Carlyle's name never appeared. The infamous PEU closed on LifeCare just weeks before landfall.

Carlyle's lawyers attempted to "Joseph Hazelwood" clinicians who stuck out the storm and did their best to offer care under horrific circumstances. While HCA chartered medical evacuation helicopters to shepherd sick patients to working hospitals, LifeCare patients simmered in a toxic stew within a dead facility for five days.

A New Orleans grand jury didn't buy Carlyle's "rogue doctor" story and failed to indict any medical professionals. That's when the PEU boys and their lawyers offered a truly innovative defense. Carlyle blames FEMA, citing patients became wards of the federal government as soon as federal evacution teams set up in the area. Apparently non-clinicians several miles away are more qualified to care for patients than LifeCare's credentialed doctors and nurses. That is, if LifeCare doctors stayed in town for the big event? I find it hard to believe long term acute care patients' needs could be met by one ENT specialist, Dr. Anna Pou.

Yes Mr. Gertsner, culture is what you do when people aren't watching. Yours stinks, at least that's the view from West Texas. Yes, that's the state that gave Vought $35 million in economic development funding to add 3,000 jobs by 2009. With six months to go and no one watching, what will Lou do as Carlyle's culture leader? It looks like he'll take the money and run. Carlyle plans on cashing in their chips via an IPO. Future shareholders, watch out for that contingent liability!

Wednesday, July 16, 2008

Bush Appoints P3 Proponent While Claiming Executive Privilege

President Bush played the shell game on an unsuspecting American public as he cited executive privilege for Justice Department Chief Mukasey regarding the leak of CIA agent Valerie Plame's name. Never mind, Mukasey was nowhere near the Justice Department at the time of the White House engineered leak. Bush's claim keeps the public from noticing the shell with the pea. Thus they miss their taxes virtually guaranteeing hefty annual returns to private companies creating public infrastructure projects.

This pea came in the form of a political nomination intended to grease the skids for such deals. The White House website states:

The President intends to nominate Thomas J. Madison, of New York, to be Administrator of the Federal Highway Administration at the Department of Transportation. Mr. Madison currently serves as President of the Spectra Subsurface Imaging Group. Prior to this, he worked as Commissioner of the New York State Department of Transportation.

Mr. Madison took the job at Spectra in March 2007. By November he presented to an august body of private infrastructure contractors and government leaders. His PowerPoint presentation lauded the benefits of public private partnerships, also known as P3. In return for billions of dollars of private investment, corporations collect user fees for services. While the deals vary, many provide an exclusive franchise, guaranteed competitive advantages, and preferred financing arrangements. The politically connected Carlyle Group started an infrastructure fund, citing an expected, low risk 15% annual return.

At the Department of Transportation Thomas Madison joins Mary Peters and D.J. Gribben, other proponents of P3. That sounds like a trifecta for private equity underwriters (PEU's) like Carlyle. I can see them lining up at the cash-in window. And when the public wants to know the details of those deals, Bush may again cite Executive Privilege.

Monday, July 14, 2008

Once Again, FBI Not Investigating Carlyle Group

The latest non-investigation of the Carlyle Group's use of political influence involves possible bribes made on behalf of Synagro Technologies, a Carlyle portfolio company. Detroit leaders are under the microscope for their role in awarding a $1.4 billion sewage sludge processing contract to Synagro. The politically connected private equity underwriter (PEU) purchased Synagro Technologies in April 2007.

Other free passes came courtesy of the Executive Branch. Frances Townsend completely omitted Carlyle's LifeCare Hospitals from its Hurricane Katrina Lessons Learned report. This seemed odd as LifeCare New Orleans had the largest hospital patient death toll post landfall. Also, this topic never came up as Carlyle pursued ManorCare, a huge nursing home provider. If Carlyle could fail patients in one of twenty one long term acute care hospitals in a time of crisis, what might it do with over 500 mostly nursing homes?

The good news with all these non-investigations is Carlyle gets to keep their good name, something very important to the PEU. But, I smell something and it's not sewage sludge.

Friday, July 4, 2008

Moody's Blames Underlings

With "the buck stops here" ancient history, Moody's cast blame on its faulty rating system for securitized mortgage instruments to computer bugs and bad apple employees. The Financial Times reported:

The FT revealed in May that a computer bug had distorted these ratings (the company was aware of the problem in February 2007). However, Moody’s maintained the top-notch ratings on these products until 2008, when they were downgraded amid general market declines. Investors in some CPDOs have lost up to 60 per cent of their capital. Revealing the breach of its code of conduct, Moody’s said: “Members of a European CPDO monitoring committee engaged in conduct contrary to Moody’s code of professional conduct.

Moody’s stressed it would overhaul its processes more broadly. “We are taking immediate and appropriate action to address the lapse in our rating process and to ensure that a similar event does not occur again,” it said.

If rogue employees and computer glitches were the problem, why then overhaul its processes more broadly? Something smells like blame delegation and management CYA. But that odor permeates our hallowed halls of government and corporate board rooms. Sad days, indeed for those desiring true leadership.